The Indian Economy Blog

April 18, 2008

The Indian Real Estate Bubble — circa 2008

Filed under: Business,Real estate — Arjun Swarup @ 5:18 pm

There was a post on IEB in December 2006, on whether there was a bubble in Indian real estate (Link), courtesy IEB reader Annamalai Veerapan.

16 months later, Annamalai is back with a follow up post on the real estate bubble. It is reproduced below in full –

______________________________________________________________
Who owns real estate loans in India?

I’ve been waiting for some official confirmation of the bursting of the real estate bubble in India. Although bursting of the bubble (or even the existence of it) is still just hearsay, it is widely accepted that Indian real estate market is stuttering (to put it the best way I can). This article in the New York Times puts the depreciation in New Delhi and surrounding areas at 20%. I thought this is a good time to do a followup on my first post on Indian real estate.

In the midst of the bursting housing bubble in US, UK, Spain, Ireland ..etc., sub-prime has become a common word (it also was nominated as the word of the year). There are several articles, blog entries and web sites detailing the life cycle of a mortgage loan in these countries, especially in the US, talking about how these loans are converted to Mortgage Backed Securities (MBS) and packaged as Credit Default Obligations (CDO) and sold to hedge funds, central banks, private investors and investment banks. Although it is not exactly known who owns how much of the toxic mortgage loans, at least we know what happens to these loans in a general sense. This is very important in the current scenario for any kind of safe investment in the stock market or even to have a decent understanding of the current complex derivative based economic environment.

I’ve been trying to find out what happens to a mortgage loan made in India. Does the bank own it? Or do they sell it as MBS? If they sell it as MBS who buys it? What are the risks for ICICI, HSBC and the other large mortgage lenders in India, if there is a 20% to 50% crash in real estate prices in India? Does India also have a fractional reserve banking system? With the foreclosure process in India not that well defined who will end up holding the bag?

All these questions arise if we assume a deflating housing bubble. I know many readers still feel that there is no housing bubble in India. Let us keep that aside for the time being and let us assume hypothetically that there is a bubble in India and it will deflate 20-50% and and try to answer the following

  • What does ICICI/HSBC do with a mortgage loan they issued?
  • Are there any organizations equivalent to Countrywide/ New Century whose main role is issuing mortgage loans?
  • Are mortgage loans in India securitized and sold?
  • If yes, to the above question, who are the buyers of these securities?
  • What is the foreclosure process in India? How simple and efficient is it?
  • What happens when someone defaults on a home loan in India?

I’ve done some (re)search and I will sum it up in the next email/ post.

116 Comments »

  1. “What happens when someone defaults on a home loan in India?”

    Well, I assume Indian banks are banks like everywhere else (except N. Korea, LOL) and work the same way. For starters, the Indian real estate market IS a bubble and if I were a bank I would be salivating. If a borrower can not service his mortgage anymore the loan is revoked and his house will be taken over by the bank. If he has paid up for, say, 2 years already that money is gone and so is his house. Excellent business for banks.

    As for securitizing home loans in all the various ways, first I don’t think the expertise is there in India and most importantly I doubt there would be a market to sell into.

    Comment by Hans — April 18, 2008 @ 8:03 pm

  2. Hans, may be you want to check this
    http://economictimes.indiatimes.com/News/News_By_Industry/Banking_Finance_/Banking/ICICI_announces_Indias_largest_securitisation_programme/rssarticleshow/2879574.cms

    Not sure if the issue was a success.Ofcourse this is still a far cry from the alphabet soup that US banks have managed to create.

    To the IEB readers: Shouldn’t RBI be credited for jumping in 2006 and curtailing the off balance sheet financing by banks? On hind sight it seems to have been a very good move

    Comment by barbadkatte — April 18, 2008 @ 10:56 pm

  3. even if there is a bubble in indian real estate, banks might not do bad…the simple reason being a bank in India pays only 90-95% of the declared value of the apartment, but the actual value at which its being traded may be 1.5 (or more) times that. So the borrower has much more equity and hence less prone to default…hence good for the bank.

    Comment by swap — April 19, 2008 @ 3:11 am

  4. Hans,
    That’s good business if property values are not crashing. If property values crash by 30% or more per annum ,they make huge loss. Give u an example. In 1998 our neighbour’s home was valued at 30 lakhs. In 1999 it was valued at 17 lakhs. That’s a depreciation of over 40%. That can be loss making even if the loan was paid for 2 years

    Comment by satish — April 19, 2008 @ 4:51 am

  5. Note as swap mentioned,
    All the realestate boom you see is not “official”. Because in India anywhere the land rates are “fixed” by the govt.
    Regular banks provide money only for this official value, sometimes may go up to even 100% but the market value even in the most depressed time will be minimum 1.5-2(usually 5-10) times that value.

    Would you believe that official rent of my house would be somewhere around 400 but market rate is 6000?

    Comment by Ravi — April 19, 2008 @ 12:03 pm

  6. Let’s analyze the sector and company data:

    Background:
    first of all, indian mortgage market is a tiny fraction of US-counter part. Our total loan-advances (all loans..not just mortgage) is around <$0.5 triilion is 2.3% of US Advances.

    That kind of massive asset-requirements drove the US banking system to securitization in mid 90′s where these recievables were being bundled up and offered as bonds to investors, with initial sole purpose of freeing up capital to do more business . The problem lies with investors who seem to have miscalculated the risk being taken for these returns. Good amount of CMBS (commercial mortgage) is still being floated into market in this quarter also, with relatively no issues as it’s usvally taken by hedge-funds with good risk-modeling in
    terms of pre-payment namely extraction and contraction risks.

    When overseas investors and banks got into this market as buyers , ignorant of underlying risks and attracted by higher yields..things got over-heated. 1yr back, my blog had an article on this at http://policycritique.wordpress.com/2007/08/10/credit-squeeze-from-all-corners-blame-whom/

    Let’s take ICICI (10% share in total loan advances in india) as our candidate for analysis.
    (Sources: 178 page Annual report of ICICI for yr2007 is the sole source that’s been analyzed to provide any summary info below for that bank)

    How do we issue/support loans:
    Unlike western counterparts, our banks mostly fund thier lending with thier deposits and little bit of borrowing. ICICI’s $50 billion loan advances (real estate loans constitute $20 billion) and $20 billion is mostly funded by a) $56 billion deposits and b) $12 billion borrowing.

    CDO market is relatively new even in US (last 2-3 yrs). But, MBS is being used for a long time to securitize mortgage receivables. Securitization is a sophisticated model driven process of building multi-tranche bonds upon the underlying passthrough securities with built-in derivatives to account for any internal credit enhancements of these offerings to get good rating from SP and moodys and these tranches offer different risk-return profiles that suit investors with different floating-rate obligations across various time-horizons.

    In india, It was being slowly mainstreamed by these private banks (ICICI, HDFC) trying to grow faster by originating these loans and trying to offload them to release the capital for further lending.

    Securitization:
    Again, ICICI securitized around 1.5 mil loans worth $2.8 billion. It had an obligation in terms of guarantees for around $400 million of that, which explains the relative low-offtake of these with the buyers and lack of depth in our financial mkts to support this ecosystem. But, again it’s a good start.

    Offloading NPA/ foreclosures:
    Over the last 3-4 yrs, a new recovery/liquidation process with in indian system is to sell these distressed loans to a third party aggregator. One of them named ARIC, bought around $300 million distressed receivables from banks.

    Comment by Siva Moturi — April 19, 2008 @ 2:29 pm

  7. I would like to mention that CDOs, as mentioned in the article are actually Collateralized Debt Obligations. These represent a pooled set of mortgage backed securities, sold by mortgage lenders into the market. They can include a mixture of sub-prime, prime and Alt-A mortgages. Credit Default Swaps are a form of financial instrument primarily used as a hedge in the corporate bond market, and their lender financial institutions.

    Comment by Observer — April 19, 2008 @ 5:43 pm

  8. [...] INDIA: Who owns real estate loans in India?: [...]

    Pingback by Agenda & Objectives: « Siva Moturi’s Policy Critique Blog — April 19, 2008 @ 10:19 pm

  9. [...] IEB on Indian real [...]

    Pingback by Assorted Links « Mostly Economics — April 21, 2008 @ 10:12 am

  10. Annamalai Veerapan, Siva Moturi and others, keep this one going fellas. I’ve been waiting to see how this whole thing works out. Great reading now that the sub prime mess has brought this issue to the forefront.

    Annamalai Veerapan’s post material has been well discussed among my real estate friends who calmly assert that rent is not the only factor to be looked at. In other words land appreciation is more important. Of course that gets shot when prices start to crash as has been discussed already.

    So another question: What scenario do we see where prices are to crash? So far since the 90s prices have only stagnated but have never dropped in prime metros. From my observations, land prices in prime locations are only going to go up for several years to come as more and more demand is created.

    Comment by Nikhil Nayak — April 26, 2008 @ 10:39 am

  11. Siva thanks for the informative post on ICICI with respect to mortgage loans.

    Nikhil, I’m in the ultra bearish camp with regards to Indian real estate. I expect 50-60% price declines in the next 3-5 years.

    Its not correct to say that prices have never gone down since 90′s. In the mid 90′s prices went down in all metros in India. Robert Shiller’s book “Irrational Exuberance” (second edition) has documented that in and around Delhi the prices went down about 20% during the mid 90′s. In Coimbatore I have seen prices going down from 1.2 lakhs to 85K per cent of land near my home. I have a first hand anecdotal evidence from my friend of a price drop of 30-40% in Pune. I think the reason not many noticed it, was that there was no mass speculation. But recently speculation in real estate has been en-masse and has been in a scale never seen before.

    Now I’m trying to traverse the what would and what if scenarios after a real estate collapses in India.

    I’m trying to blog on ‘Indian Real Estate’ at http://surreal-state.blogspot.com/. Planning to be more active in the future….

    Whatever it is, we are living in very interesting times.

    Comment by Annamalai Veerappan — April 26, 2008 @ 5:33 pm

  12. Annamalai Veerapan, I am not too sure about your predictions just based on what we are seeing in terms of investment headed this way. While its true that the IT parks etc are going to see price pressure there’s a whole new wave of demand coming on with manufacturing and infrastructure investments.

    While Coimbatore may have seen fluctuation earlier word is out and you can be sure that prices are going up there very soon. Another place is Kakinada where an estimated 50,000 crore (approx $11 billion) is going to be invested by Reliance, ONGC and others. I would be shocked to see prices drop at all in major cities for quality constructions in major metros.

    If prices drop its going to be in the outskirts where speculative buying and selling is going on right now.

    Comment by Nikhil Nayak — April 29, 2008 @ 10:53 pm

  13. I agree with this

    Comment by Sneha — May 1, 2008 @ 11:20 am

  14. Well one of our professor has a theory that due to black money and stamp duty all house transactions in India are70% black and 30% white on average. It is only white portion on which banks give loan. So incentive to default is less in India as compared to USA as a person’s house real worth is much more than than the loan he or she has taken.
    I don’t have any data to support this but would like to know view of people who are researching on this topic

    Comment by anshul — May 8, 2008 @ 1:41 pm

  15. Ohh!! You cannot imagine the happiness I get when I still see the advertisements of projects I used to visit some 6-7 months back..

    These builders have tortured common people like me for very long.. and now I can see that they are desparate to sell off the vacant flats..

    Me and my friends still enquire to many builders on a regular basis and its a common knowledge that no-one is willing to buy a pigeon hole which will leak in rainy season and which is 20 kms from heart of the city..

    I always wondered , how these builders could shamelessly ask for 35-40 lakhs for flats which looked like chawls and not even worth 10 lakhs..
    well , its pay back time..

    3 weeks back , PBAP increased rates in Pune by 5- – 400 rs PSF..
    Thatwas the last attempt to tell the world that Pune property is still rising..

    What a fiasco..

    Some people might have been lured to buy flats , because of this new rate increase..
    PEOPLE , dont fall trap to this new game from builders lobby.. there is no hurry to buy flats which are being sold at twice their actual price..

    The current market sentiment has confirmed that a correction was long due in real estate as well as stock.
    I know for sure that real estate is 20-30 % low in Delhi and bangalore.

    I am waiting for a correction in Pune real estate for last 1 year.. ( 2BHK in Wakad at 40 lakhs , 2 BHK in Kharadi at 38 Lakhs.. are you kidding me ?? what do these builders think .. if this is california outskirts ?? )

    I also got confirmed news , that in a recent meeting of PBAP , they decided to boycott any builder who reduces rates..

    but then , well there was Mont Vert who does not belong to that league.. after reducing the rates for their upcoming projects last week end, Mont Vert has started the downfall of these greedy builders at last..

    this could well be the start of the buyers market.. and I think the downfall in real estates will happen over next 1 year..

    But then , my question is “How do you know when is the right time to buy? ”

    Do I wait another few months?

    I know for sure that second hand flats in good areas are being sold at a bargain..

    So what should be the best time for all of us to book a good flat in coming months / years :-)

    Comment by Bubble will burst — May 9, 2008 @ 3:50 pm

  16. Ha! The Pune real estate story is a real fantastic story, driven by speculators, “feel rich” IT folks in Hinjewadi and similar guys. No local job in Pune for the average Engineer/CA/Doctor (non-IT) can pay enough to cough up 50-60 lakhs for a flat which till recently could cost not more than 10 lakhs max. With zero amenities to speak of, no high local income (as compared to say Mumbai- on an average all salaries in Pune may be 30-40% lesser than in Mumbai) it is wonder that the boom is still lasting. It has always been an enigma to me as to the identity of the ultimate buyers of these flats. Or is it circular trading ? ( A sells to B at 20% margin, B sells to C at further 20% margin and then it goes back to A who again sells to B,etc. As long as the trades happen and cash flows back and forth everybody thinks they are making a lot of money)
    One hypothesis that I have is that these flats are mostly bought by senior citizens whose sons/daughters are in US in IT job, who send them loads of dough-not knowing what to do with, say 20-30 lakhs at a time- the old geezers straighaway plonk it into a flat and forget about it. After all, house prices never come down? Right?

    Comment by Cool Head — May 10, 2008 @ 8:59 pm

  17. Look at this comparison of rent vs buy option in Bangalore. It indicates a big price correction soon

    http://bangalore.craigslist.co.in/rfs/674729675.html

    Comment by Shyam — May 10, 2008 @ 10:07 pm

  18. Well, Shyam, this is not a new phenomenon. Even in Mumbai, Pune the rental yields on residential property have always been low (not as low as in Bangalore but in the range of 5% or so).
    This is similar to the Indian mentality in buying shares in companies. Nobody buys it for dividends but only for the capital appreciation.

    Comment by Cool Head — May 11, 2008 @ 7:24 pm

  19. well i have been hearing about bursting of bubble for last one year but nothing hs actually happened and price of my rented flat (in delhi) has only gone up. but there seems to be so few transactions it is difficult to say that prices are down? what seems to have happened is that nobody is selling and buyers are waiting for correction.
    meanwhile retals have gone up very fast and there is very limited supply? we can say that buuble is burst only when people start selling at lower prices

    As for problem that mortgage lender might have in case of crash – worries expressed here are meaningless indian mortgage market can not be compared to US market here home equity is very high as stated price of purchase is rarely more than half of actual price so even with sharp crash there will be very few foreclosures

    Comment by indrajeet — May 12, 2008 @ 2:14 pm

  20. This is in response to the post about 90s stagnating real estate prices. Since inflation in India mostly hovered in the 8 to 15% region during much of the early 90s, this would mean real estate prices adjusted for inflation (real) actually dropped.
    This is what might happen in the present, with nominal prices stuck at the same level for a couple of years and inflation running at 6 to 10%.

    Comment by Rohan — May 15, 2008 @ 1:56 am

  21. Author said that he will publish another post to summarize his findings… has he published anything yet?

    Comment by Kaubhai — May 20, 2008 @ 6:21 am

  22. It is now predicted that the inflation rate in India could climb up to 10%. What does this mean for the realestate. Can some expert comment on the relationship between inflation and realestate price.

    Comment by Sukuji — May 27, 2008 @ 11:39 am

  23. sukuji, generally real estate is a good hedge against inflation.

    See the article from ET

    Comment by Nikhil Nayak — May 28, 2008 @ 12:50 pm

  24. Any body have clue that, how much the US housing prices declined from the peak amount.

    Since in one of the article I read that, the year to year decline is 14.47%

    What is from the peak level.

    Since if the US market tumbles and the whole economy is in problem then as most of analysts have strong believe on the indian economy for the next 10 years, the possibility of correcting more than 20% is high question.

    Any body through light on this

    Comment by R. Yuvaraj — June 3, 2008 @ 11:00 am

  25. The latest data shows the median US home price is $200,000. This is about Rs. 84 lakhs. Note that these US homes are independent houses, not apartments and the surrounding infrastructure is excellent (roads, power, water). Now compare this with the inflated apartment prices here, with no roads, water or power and tell me, who will buy apartments here?
    Secondly the present GDP growth in India may be around 8% and the retail (not WPI) inflation may be 12% (just wait till the high diesel prices seep through the economy). This means that far from growing the Indian economy is SHRINKING (GDP -Inflation).
    Now analyse this economy and the real estate prices based on this and draw your own conclusions.
    Cheers!

    Comment by Cool Head — June 6, 2008 @ 6:14 pm

  26. In India you can park all your black money in the real estate.

    In all other places, the investment can be easily tracked.

    Hence all the persons who have enormous black money is investing in the real estate only. This is one of the reasons for sky rocketing real estate prices.

    Unless otherwise to track the real estate investor by imposing the PAN number like in equities and bank, the middle income persons owning the home is going to be dream hereafter

    Comment by R. Yuvaraj — June 9, 2008 @ 3:59 pm

  27. Recently was looking for a 2-3 bhk flat in pune.. builders are willing to negotiate and give big discounts already in pune. The tremendous amount of new construction has created a big supply and very low demand as most people cannot afford the 40-45 lakh flats for a chawl kind of flat. And on top of the mentainance costs are shooting up like anything (thanks to the ‘swimming pool’ and some stupid other facilities which an average person would never use). The rental yield is negligible. (Feel sorry for people who bought earlier but,) the property prices got to come down sharply in Pune.

    Comment by Sharad — June 11, 2008 @ 3:27 am

  28. Tend to agree with Sharad.

    However, the comment of Yuvaraj is also true to some extent. Black money is something which is driving Real Estate market in India. Even if the PAN no. made mandatory, this will not create any dampner for Politicians, Mafias and Terrorists group investing in Real Estate. They know how to over-rule this requirement.

    We are riding on a biggest myth of the century – ‘The Indian Growth Story’. If one has to understand what growth mean, he / she needs to understand various aspects of – Social Reforms, Civic Reforms and Economic Reforms. In practice, every country that is developed as of today, they passed through this sequence:

    1. Social Reforms: People became more aware about their social responsibilities. They developed respect for their own communities and nation. Greed started evaporating. Every person at ground level started understanding the society and paid respect to it. The legal framework were developed based on those Social reforms and enough protection were given to Citizens against all evils. Education was given highest priority in the society.

    2. Civic Reforms: People started understanding the bad impacts of menace they kept creating around. They understood the importance of cleanliness, traffic discipline, security, infrastructure etc. They started undestanding the importance of circles covered by Police, Fire Brigade, Power utilities, Gardens, Play grounds, Schools, Hospitals, Water supply, sanitation etc. For these, the governments were absolutely depended on Tax incomes and citizens were aware about this fact. They paid the taxes very generously and government ensured that the tax money collected are best utilized. Utmost attention was paid to these features. The most important factor here in all those now developed countries was that THERE WAS NO CORRUPTION.

    3. Economic Reforms: Once a level of Social and Civic reforms were achieved, governments could concentrate on Economic reforms. They started opening up new avenues of income for nation.

    All these went in a spiral and the nation started developing.

    Now, compare India. Our Society is a big mess. Nobody, repeat, nobody understands the Respect for others. Everybody is trying to fool around other people, for own survival. Our Legal framework is not available for ground level people.

    The progress of Civilization in India is pathetic. Though we take proud in saying ‘Unity in diversity’, this diversity of Language, caste and race has create a huge chaos. Cleanliness is limited to own homes, in some cases. Traffic discipline – What is that? We take pride in jumping signals, overtaking vehicles unnecessarily and taking risks on road. Tax saving is an another name for shying away from paying taxes and government is always ready to prove that the tax money collected is going down the drain. Corruption is the part of normal life.

    Finally, what we have done is opened our gates for Economic Reforms !!! Again this is absolutely thoughtless process which has gone into the system, without any good plan. This creating a huge distance between poor and rich. And we are taking proud in making some richest PERSONS on earth.

    I think, we will continue to produce more richest persons on earth, but will never emerge as Rich nation.

    Comment by Atul — June 11, 2008 @ 10:27 am

  29. Tend to agree with Sharad.

    However, the comment of Yuvaraj is also true to some extent. Black money is something which is driving Real Estate market in India. Even if the PAN no. made mandatory, this will not create any dampner for Politicians, Mafias and Terrorists group investing in Real Estate. They know how to over-rule this requirement.

    We are riding on a biggest myth of the century – ‘The Indian Growth Story’. If one has to understand what growth mean, he needs to understand various aspects of – Social Reforms, Civic Reforms and Economic Reforms. In practice, every country that is developed as of today, they passed through this sequence:

    1. Social Reforms: People became more aware about their social responsibilities. They developed respect for their own communities and nation. Greed started evaporating. Every person at ground level started understanding the society and paid respect to it. The legal framework were developed based on those Social reforms and enough protection were given to Citizens against all evils. Education was given highest priority in the society.

    2. Civic Reforms: People started understanding the bad impacts of menace they kept creating around. They understood the importance of cleanliness, traffic discipline, security, infrastructure etc. They started undestanding the importance of circles covered by Police, Fire Brigade, Power utilities, Gardens, Play grounds, Schools, Hospitals, Water supply, sanitation etc. For these, the governments were absolutely depended on Tax incomes and citizens were aware about this fact. They paid the taxes very generously and government ensured that the tax money collected are best utilized. Utmost attention was paid to these features. The most important factor here in all those now developed countries was that THERE WAS NO CORRUPTION.

    3. Economic Reforms: Once a level of Social and Civic reforms were achieved, governments could concentrate on Economic reforms. They started opening up new avenues of income for nation.

    All these went in a spiral and the nation started developing.

    Now, compare India. Our Society is a big mess. Nobody, repeat, nobody understands the Respect for others. Everybody is trying to fool around other people, for own survival. Our Legal framework is not available for ground level people.

    The progress of Civilization in India is pathetic. Though we take proud in saying ‘Unity in diversity’, this diversity of Language, caste and race has create a huge chaos. Cleanliness is limited to own homes, in some cases. Traffic discipline – What is that? We take pride in jumping signals, overtaking vehicles unnecessarily and taking risks on road. Tax saving is an another name for shying away from paying taxes and government is always ready to prove that the tax money collected is going down the drain. Corruption is the part of normal life.

    Finally, what we have done is opened our gates for Economic Reforms !!! Again this is absolutely thoughtless process which has gone into the system, without any good plan. This creating a huge distance between poor and rich. And we are taking proud in making some richest PERSONS on earth.

    I think, we will continue to produce more richest persons on earth, but will never emerge as Rich nation.

    Comment by Atul — June 11, 2008 @ 10:27 am

  30. Its a very natural process to initiate the thinking of a bubble in all the markets where prices increased at a furious pace in recent years. I am hoping for the same as waiting for my first purchase of house but when logically thinking I dont see a busting of a bubble in Indian real estate in near term. The reason for my reluctance are the answers of the questions raised in the blog. So I will answer the questions with the explaination.

    What does ICICI/HSBC do with a mortgage loan they issued?

    Banks in India support their Loans with the deposit portfolio. Unlike US, its not a general practice for the indian banks to securatize their assets. This lack of process has controlled the ability of the banks to grant more loans and so, with the limited funds available, loans are granted to the only people who are worth lending. Where in US due to excess availability of liquidity, flow of money was towards risky borrowers (Sub Prime Borrowers). Moreover, house purchase is considered as a sentimental decision for an Indian buyer, who is not as careless to raise his debt to a level which is unfundable. Due to this reason, Indian consumer is more reluctant to foreclose his property.

    Are there any organizations equivalent to Countrywide/ New Century whose main role is issuing mortgage loans?

    As I said, the role of such institutes is limited.

    Are mortgage loans in India securitized and sold?

    No.

    If yes, to the above question, who are the buyers of these securities?

    N.A.

    What is the foreclosure process in India? How simple and efficient is it?

    This is one another major difference in the forecloseure procedure of Indian Banks and US Banks, which limit the foreclosure in India. In US, banks issue loans with the property as a mortgage. And the loan is non recourse in nature. So the banks has the power to collect the dues only from the mortgaged property and not from the borrower. So for example, home buyer has taken a loan worth $2mln for the house that was worth $2.1mln at the time of issuance. Now suppose the outstanding amount is $1.8mln where as worth of the underlying house has been decreased to $1.6mln. So if the home owner does not pay the dues, bank will foreclose the property and sell it for $1.6mln. US Banks can not ask the borrower to pay the difference of $0.2mln.

    Where as in India, loans are recoursable. So, in above example, An Indian borrower is required to pay the difference of $0.2mln to bank.

    When loan is non recourse, it makes a sense for the buyer not to pay the due of $1.8mln and foreclose the property and buy the similar property in $1.6mln. This option is not available to Indian Buyer.

    So, the likelihood of foreclosure is reduced in India.

    Another reason being, Indian consumer doesn’t use house equity to finance his other purchases as it was the case in US. Which will limit the vicious cycle of correction in other sectors of Indian Economy.

    So, why the prices are rising so much???

    In the long run, real estate prices can’t grow more than a growth in personal income. The recent rise in the real estate could be the paradigm shift in the valuation which happened due to the increased income of households and increase in GDP. So, once prices reach new trajectory it will grow at a growth rate of income.

    Comment by Shiv Desai — June 12, 2008 @ 1:02 pm

  31. Hi,
    Eventhough I am a late entrant into this enchanting discussion, let me try and answer Annamalais questions as I have a very relevant experience in Funding real estate and mortgage loans.

    In India the majority of the loans (retail) are being funded by the major banks like ICICI,HDFC, SBI etc but there are also small time players in the market like WIESSMAN,GIC housing etc who are doing mortgage loans.
    All these players securitise these loans for generating cash flows.I dont have much idea on who are the major players invloved in the buying, some amount of research have to go in that.

    Foreclousre of a loan(retail) is pretty flexible in India. Some major players do not have a foreclosure charge/penalty, some players charge 2% of the loan which is outstanding at the time of foreclosure.As there is a good composition of NRI’s investing in real estate in India, the chances of foreclosure is high as NRI’s belong to higher salary brackets and have more savings compared to their Indian counterparts. Some lenders also have different foreclosure charge/penalty depending on the type of Interest rate you choose. For instance a Floating Rate loan will not attract a foreclosure charge, wherein a FIXED RATE might attract.

    Default or NPM(Non Performing Mortgages)are a rising threat to the loan providers. Almost 2-3% would be my wildest guess of the loans which are NPM shown in the books of major players in India.The amount of fraud in terms of legal documents/ employment is also increasing manifold now a days. Thanks to the norms like KYC(know Your Customer) and SARFAESI Act which has been introduced by the regulators that act as a breather to the institutions

    Comment by Jayakrishnan — June 13, 2008 @ 1:25 pm

  32. Hmm.. not sure if the real estate bubble is bursting in the real market, but the tsock market definitely seems to be pricing in a crash. The stocks have corrected by 50-70% from their peaks. More importantly, top stocks like unitech are quoting at about half their estimated NAV. In such a scenario, i think its a better bet to own real estate stocks rather than buy property. Even if the real estate market corrects by 20-30%, the stocks may not go down by much since such a crash is already been factored into the share price as indicated by the low ‘price:NAV’ ratio.
    And with the stock futures market, an investor also has financial leverage which is comparable to what one gets in the property market via mortgages.

    Comment by sai aravindh — June 14, 2008 @ 3:28 pm

  33. I totally disagree with sai arvindh. If you have gone through recent developments in last week, all the major losers on BSE were real estate majors like DLF & Unitech. If the prices of real estate crash, the profit of real estate companies comes down & hence it does not fare according to the market expectation which results in selling of shares which ultimately results in loss for the said scrip. Many real estate developers were banking on banks like Kotak Mahindra & other private equity holders but since real estate will now be going in a toss, the financial institutions have backed off. Add to this high oil prices & rising inflation. The developer in many cases is not even able to repay the interests. If this trend continues, the banks will get the attachments done & we will see the Indian version of subprime version, though it may not be of the same extent. Never forget the 1996-98 era of real estate. Better stay away from real estate for next 6-12 months till the picture gets clearer.

    Comment by Parimal — June 15, 2008 @ 3:36 pm

  34. @parimal
    My suggestion is applicable only for those who feel bullish to neutral on the real estate sector. The real estate stocks are relatively better bet than investing directly in property. If real estate prices crash, obviously you would lose money whetehr you inevsted in the stock or property. But on a RELATIVE basis, you would end up losing a lesser amount if you had invested in the former.

    Comment by sai.aravindh — June 16, 2008 @ 1:58 pm

  35. @cool Head
    I don’t know why someone didn’t point it out yet to you
    8% or 9% growth that you hear about of indian economy is inflation adjusted, roughly if inflation is 10% and India economy grows at 9% it means 19% nominal growth(this is crude way though to calculate) Check finmin sites for nominal GDP sizes and you can calculate nominal growth.
    @atul
    Nice commentary but little too simplified with touch of red (!)
    one recent work is from world bank development report and they also cud not come up with the ultimate mantra of development after 2 years work and Nobel Laureates …100 seminars etc. because I guess there is none(remember Kurt Godel).
    But they do come up with certain common feature of the countries which broke the poverty trap to be called miracle economies.
    Swaminomics (http://timesofindia.indiatimes.com/Opinion/Columnists/Knee-deep_in_the_12_deadly_sins/articleshow/3089475.cms) does a fare job of measuring them for us as well as S. Narayan (http://www.livemint.com/2008/06/08230751/Ground-reality-is-different.html)
    They are though pretty different from your idea of “NO CORRUPTION” utopian world.
    Also my favorite is actually Jeffery Sachs in his book “end of poverty”

    Comment by swaptions7 — June 17, 2008 @ 8:35 pm

  36. sai aravindh

    I think your startegy of replacing property with real estate will put investor more exposed to market swings then the property market. During last year, SENSEX gained 40% and lost the same where as property market is bit sticky towards the downside. Note that I am not saying that the property market in India can not give negative returns. I am just saying that it is more sticky then the real estate stocks downside. Property prices declined in US and Japan in past does not imply the same actions will take place in India with the same magnitude. All asset prices experience paradigm shift and this surge in property market can be one of them. We need more data like New Home Sales, Resale, Home Inventory, Mean and Median Prices of recently sold homes to conclude on a more concrete way. Although I believe that the Real Estate prices may decline upto 10.0% post Olympic fueled by decrease in basic metal and cement prices as the marginal demand for those products by China will eliminate.

    Comment by Shiv Desai — June 19, 2008 @ 10:03 am

  37. I am planning to buy a flat/apt in hyderabad or bangalore. The flat in hyderabad and bangalore is around Rs 3000 to Rs 3500 per sqft. Though the builders claim the flat area to be 1400 sqft 1600 sqft or 1800 sqft, 30% is being lost in the common area and the carpet area comes around 30% less. This mean I am paying much higher than Rs 3000/sqft if I buy a flat for Rs 3000/sqft. I currently dont see any flat to be worth 50 lakhs. I feel it is too high. I have a 200 sqyard of empty land at a prime location in hyd. I am confused on whether to buy a flat or build a flat/house of my own on that land. As there is a steep increase in cement costs and steel and labour, I just wanted to know what could be the cost diff between a purchased flat with carpet area of 2000 sqft and self built house/flat of same area ?? or should I invest in stock market as the market is down right now and later when the market improves withdraw the invested money from the stock market and invest in a house ?? I am confused between these two. Any suggestions are welcome.

    Comment by Sidharth Middelau — June 19, 2008 @ 11:21 pm

  38. Sidharth Middelau

    The expectation

    The real estate in india will correct 20% to 40%

    The steel and cement pricess will get corrected after October.

    The stock market may touch BSE sensex 12000.

    But no knows about the actual.

    If you are interested in stock market, they you may start to invest. For that purpose the following strategy may be adopted

    Find 5 best companies in different sector

    The investment amount may be divided into 6

    For every 500 points correction, one portion of amount may be divided into 5 equal parts and invested in the five companies.

    I feel this is one of the best think to do now in this uncertain economoy

    Comment by R.Yuvaraj — June 20, 2008 @ 2:04 pm

  39. Thanks Yuvaraj,

    To invest in stock markets, do you suggest SIP or bulk investment ?? I also want to invest in some tax saver funds. any suggestions. By the way any idea on where the home laon interest rates go up in 2008 and 2009. Any indications that it will come down below 10% in the next 2 or 3 years ??

    regards
    sidharth

    Comment by Sidharth Middela — June 23, 2008 @ 11:49 pm

  40. Pune real-estate is a big bubble which is about to burst. That place has no advantage but hyped by its builder and politicians. This is not a capital place. Pune is the only city which failed to provide its plans for Metro rail amongst 6 other cities. No international Airport. I have been hearing about chakan airport since years now. Mumbai, Hyderabad, bangalore got their second international airport after that. Someone calls its as IT city. And I put a bet that its not even 10% of bangalore.
    Infact what Pune claims as their IT power ( Infy , Wipro etc ) are bangalore based companies. Lets talk abt Automobile Hub. Recenly Chennai has got so many new investments on auto. I would say Pune is not bad, but its certainly doesnt qualify to be called as Auto hub. Infrastructure is so pathetic in pune that one falls sick after visiting this place. Climate is extreme in pune compared to Bangalore. Again I am saying its a Hyped place and one day its going to burst like anything. People call its Oxford of east. How can a place without IIT, IIM or any other premier institute can be Oxford.
    Recently I saw a ad in Times Of India. Lavasa, it seems its a first hill station after independence. I couldn’t control my laugh. How does it matter if its was pre-independence or post independence. But if someone is falling for it, he is really stupid.
    Anyway I have too many theories to prove that Pune real estate is about to crash.
    Well I believe in demand-supply equation. and as far as I think like other places demand must have definitely crosses supply. So like any other place, it has to crash.

    Comment by Sachin — June 25, 2008 @ 6:15 pm

  41. This is a very interesting discussion and I could not resist participating. I have been actively involved in the Indian RE markets over the past 5 years. I am an investor in Indian RE and I have worked in the capacity of an investment banker assisting foreign PE funds and RE funds find the right developer partners in India. As we all know, the markets in India have witnessed an unprecedented up move which sometimes gives the impression of a huge RE bubble waiting to burst. Let’s try and analyze this assertion. You may also read my detailed blog at http://www.meridharti.com.

    Firstly, I feel it will be incorrect to characterize the entire Indian market to be caught in a bubble. Some of you who are sock market investors have probably seen the carnage unfold in the US markets (not to mention the Indian market meltdown) over the last several months. Over the last 3 months, the Dow is down by approx. 9%, Merill Lynch is down by 27%, Morgan Stanley is down by 22%. However, even in a market unable to find a bottom there have been winners such as Apple which is up about 15% and Research in Motion (manufacturers of Blackberry) is up about 7%. The point I’m making is that it is possible to find gems even in a downward moving market. Infact, to extend this analogy further, I would say the prices in Tier I cities are by and large within fair price range. The real problems are with Tier II and Tier III towns (Just about two years ago Tier II and Tier III were the new hope for RE investors who missed the Tier I bandwagon!).

    contd….

    Comment by Ashish Abrol — June 27, 2008 @ 9:50 pm

  42. I had to break up my comments in two parts since the system would not accept it in one shot..

    It is difficult to look at the headline numbers and not react. When someone tells you prices in Bangalore have moved up from about Rs.1500 psf 3 years ago to over Rs.3500 psf today, it would definitely scare you as an investor especially when one sees his or her salary having moved up only 20-30% in that period (that too for the lucky few) . However, we need to look at the buyers of property in Tier I cities. A lot of the residential supply in Tier I cities has been absorbed by the new wealth creators such as entrepreneurs, promoters of large corporations (vesting their options in a booming stockmarket) and old money. Old money is a very important contributor since this money was always there but this class of people had few avenues to invest it earlier. This class of investor has purchased these apartments to further rent out to foreigners, expatriates, senior executives at rental yields ranging between 4-6% (for prime furnished residential properties). By any standard, that is an attractive yield for residential investment.

    I want to address another point a writer on the blog expressed. Someone spoke about median home price in US being equivalent of INR Rs.84 lacs with much better facilities as compared to India. The comparison being that in India you don’t get anything for that money. Well, we need to look beyond the headlines. Median price of $200K in US is for the entire country which includes suburbs, exurbs, rural and urban areas. Do you know you can still buy an apartment in the National Capital Region of Delhi (NCR) for under Rs.30 lacs? Read http://www.meridharti.com . This is the heart of the country. If you want to compare Pune or Bangalore prices, do not compare them with the US median but instead compare them with prices in US cities such as Atlanta, Dallas, Houston or even Chicago. For a comparison of Mumbai and Delhi prices, I would compare with San Francisco and Manhattan. In such a comparison, prices in India are still cheaper by 40-70% ! In the US, you definitely have better infrastructure but the taxes you pay for that could range between 1-1.7% p.a of property value. In Delhi, for a property with a market value of Rs.4 crores ($1 Mi), the annual taxes are Rs.15,000 (0.04% of property value!). It is easy to see why there is no infrastructure in India. In economics, there is no free lunch.

    I’ll come back to this later but all those interested in a thorough analysis of the market forces at work in India, please read my blog at http://www.meridharti.com. I update it regularly. Please feel free to write comments or send me questions.

    Later,
    Ashish Abrol

    Comment by Ashish Abrol — June 27, 2008 @ 9:53 pm

  43. I think the comparison between property taxes in India vs USA needs to account for the fact that the majority of property taxes (more than 50%) in USA are used for funding the local public schools. My impression is that people mean many things by infrastructure, namely, clean air, water, reliable power, clean roads, good traffic sense, good customer service, law and order, justice system, transparency in official dealings, and so on. These are found to a much greater degree in the US, than in most places in India. I strongly believe that one of the reasons people in India resist paying higher property taxes is the fear that it will be mismanaged anyway by local govt officials.

    One of the other reasons these property prices in Indian metros cause so much angst among Indians is that most relatively high-paying jobs are found in the metros, unlike in the US where development is more spread out. Even the rudimentary infrastructure found in Indian metros is not available in small towns and villages in India. Hence, for NRIs living and working in places like Austin (median $175K), Columbus (median $133K), etc, away from the West and East Coasts, the value for money proposition seems unbeatable. These midwestern cities have infrastructure which is better than any Indian city, and lower prices for standalone single family homes when compared to their Indian counterparts.

    Comment by Observer — June 30, 2008 @ 11:42 am

  44. I wish citizens in a nation actually had a choice of paying taxes or not depending on whether they thought their govt. would manage or mismanage it. This is not a choice citizens make but one that is made for them by their governments. In India, taxes have historically been lower and therefore there has been lack of infrastructure. Raising taxes would provide the necessary money but unless an elected govt has clear majority it will not have the political will to raise taxes (we have an uncanny knack of electing fractured minorities into power!). That is why taxes are low in India.

    In the old India (pre 1997), there were hardly enough jobs to keep its people employed in Tier I cities. Therefore,Tier II and Tier III cities did not develop as alternatives to Tier I. However, in the last 5 years, many Tier II cities have gotten an impetus primarily due to IT/ITES companies relocating to cheaper locations in search of competitive RE and a less mercenary workforce eg. Pune, Mysore, Gurgaon, Chandigarh, Indore, Jaipur, etc. Some of these cities will be the Austins, Columbus’, Atlantas, Kansas’ of India over the next 5-10 years. Infrastructure growth will need to occur in parallel to avoid a Bangalore like infrastructural nightmare. As part of the educated lot in India, we should support the govts efforts to raise taxes (in instances I described earlier). Continued reistance to change is simply a resistance to progress.

    Read more on policy, prices, investment ideas at http://www.meridharti.com

    later,
    Ashish

    Comment by Ashish Abrol — June 30, 2008 @ 7:47 pm

  45. I do not think it is completely accurate to claim that taxes in India have been historically low. Property taxes may have been low, but the total tax burden on Indians has been, and continues to be, quite high. In addition to income taxes and service taxes, there are many other indirect taxes like excise, countervailing duty, octroi and so on. States typically levy separate taxes on fuel, property registration (stamp duty of 11-14%!), electricity and sewerage connections, entertainment…. Typically, when one buys a single family home in India, one has to pay, in addition, about 15% or more of the listed house price to the govt agencies. In many towns in the US, property taxes are typically 1.5% of the listed house price. So the choice is between paying a smaller lumpsum amount in India, compared to a lower recurring amount in the US for the duration of stay in the house.

    However, when it comes to value for money, a midwestern city in the US is a far better value proposition when compared to any Indian city. Open spaces, adherence to building codes and local ordinances, and far better transparency when it comes to property transactions, are some reasons why it makes more sense for an NRI to shift to a midwestern city rather than India. Big cities in the US, like Chicago, Boston, New York, and others, are not very good value propositions. It is also interesting to note that in these big cities, a large number of people rent, instead of owning, and are typically single urban professionals. When they get married and have children, they usually flee to nearby commuter towns outside the city, where prices, and crime, are much lower.

    Comment by Observer — June 30, 2008 @ 9:37 pm

  46. My comments about taxes were limited to property taxes since that is what we were discussing. On the other taxes, as you have correctly pointed out, India continues to be a laggard riddled with red tape, bureaucracy and complcated paperwork creatively designed to stall progress!

    I think the answer to your question (the question being- property prices are still significantly lower in India) lies in your own argument. You have written Chicago, Boston and NY being too expensive (and not VFM) and therefore midwestern cities being more attractive. Similarly, in India the equivalent of midwestern cities might be Indore (emerging for It/ITES), Jaipur (emerging…) or Nagpur. These cities offer great VFM (in terms of price). The infrastructure will take a while to develop and it is the educated elite like us (hopefully, more than armchair revolutionaries!) who will need to take leadership roles and shape tomorrows India.

    Later,
    Ashish Abrol

    Comment by Ashish Abrol — July 1, 2008 @ 8:51 am

  47. Looks like truth is coming out. And the real estate finally coming to REAL levels..
    Interest rates at 14pct, inflation at 12pct, real estate has only one direction ; DOWNWARD.

    http://www.moneycontrol.com/india/news/market-outlook/see-20-cutpan-india-realty-prices-by-oct-sp-tulsian/17/30/344983

    http://economictimes.indiatimes.com/Markets/Real_Estate/Realty_dreams_of_small_mid-sized_cos_crumble/articleshow/3182516.cms

    To give a perspective from Pune, look at the listed builders in stock market ::
    Kolte Patil Developers Issue Price: Rs 145
    Listing Price: Rs 230
    Current Price: Rs.49.35
    52wk High (Rs) 272.00
    DS Kulkarni Developers Ltd. ::
    Current price: Rs.96.25
    52wk High (Rs) 400.00

    Comment by Shar — July 2, 2008 @ 1:34 am

  48. I am an NRI from Australia with long and regular connection with India, UK and Australia.

    I have seen the rise and fall of Australian & UK real estate cycle twice.

    Those cycles have/had the same characteristic as what is happening in India (Except India is more aggressive)

    Both equity and real estate Cycle in Australia is about a 7-8 year cycle.
    India seems to have longer Cycle 10-12 year.

    As an economist and a property owner in India and abroad – all I can say is what is happening in India is extreme greed and speculation – This illogical and unsustainable.

    I love to see my property value go up but in a sustainable level and in tandem with macro economy.

    I have seen dealers/Traders entering in to POWER OF ATTORNEY DEALS and then trading it to third party for a huge profit.

    I have seen uneducated brokers/dealers earning up to one crore in 1 year by SWITCHING couple of properties like commodities.

    I haven’t seen any market in the world that is so untransparent.

    SPECULATION IS THE NAME OF THE GAME IN INDIAN REALESTATE MARKET.

    I was quoted 1C for a property in Chennai in Dec07 and again the same property (Unsold) in March 08 was quoted 1.3C and now in June the same property (Unsold) he is quoting 1.5C in June 08

    The vendor has not sold the property in the past 6-8 months how ever he did not fail to increase the asking price by about 30% every 3 Months

    As a owner of properties in India, I am saying it is not sustainable.

    One buy great Properties In SYDNEY and MELBOURNE cheaper than Indian cities(5 metros),Sydney and Melbourne’s average Income of a Clark, Cook or a taxi driver is about 25 Lacs p/a and a average 2BR flat with 10 -15 Kms to the CBD is about Rs90 lacs.

    Greed and speculation will end in pain and COMMONSENCE WILL PREVAIL.

    If not 1997 EastAsian economic crisis (Thailand,Malaysia,Indonesia etc) will be repeted in India with a devaluation of rupee followed by inflation linked economic meltdown which would take 10 years to get back on feet.

    Comment by Gaicula — July 6, 2008 @ 7:34 pm

  49. For all the analysis that’s written here, there are a few simple truths that can’t be refuted:-
    1. I am perhaps amongst the top 5% of the 106 Crore people in the country as far as my income goes (Rs 50,000/- pm). In my late 30′s now, I can not buy a barely decent flat in a metro (even third rate ones like Pune) for it means losing my savings (about 20 Lacs) and also losing my life to EMIs till I retire. Just a flat to show at 60 with no savings whatsoever? Its scary.
    2. When I look around the city I live in, there are a huge number of brand new towers in all sorts of obscure places and with imaginative names…60% of the houses are vacant. You can make out when you see no clohtes hanging out to dry in the day, no lights switched on at night.
    3. The infrastructure (traffic, roads, water, electricity, pollution etc) sucks.
    4. Things have become terribly expensive (not just petrol but school fees for the kids too).
    5. Salary hikes (if they are occuring) are meagre compared to costs.
    6. My stocks, mutual funds and FDs are all giving negative returns.
    7. A 70,00,000/- Lac flat gets you a rent of 15,000/- pm in Delhi. That’s 2.6% per annum as per my calculator if you’re not paying taxes. Will it double to become 1,40,00,000 in six years? I doubt it. If it does, who will buy it? Moreover, who will buy thousands of such houses in each city?
    8. I don’t see any NRIs who have returned back in my city to live in those 1 Crore flats. All one meets is people migrating abroad.

    If this appears normal to some of you, I have nothing more to say. If this is what most of you feel like…I think we’ve reached the edge of the cliff.

    Comment by voyager — July 12, 2008 @ 1:29 am

  50. Well Said, Voyager!
    QED

    Comment by Cool Head — July 12, 2008 @ 8:02 pm

  51. Voyager,

    You have captured the essence so nicely.

    In Hyderabad, I see the prices still going up, and I wonder who is buying these 1 crore Apts, 3 Crore Villas in god forsaken places where there are no roads, drainage etc. Where is the Infrastructure? And where is the money (with Govt.)to develop the infra? Of all these people buying these hell holes, how many of them actually plan to live there? Or they are just trying to flip them for a profit? I see people booking 4 to 5 Apartments in the hope that they will make a quick buck.

    I think people are out of their minds. Even on a loan of 50 lacs, they have to pay an EMI of 55000 per month for the next 20 years. Are they taking for granted that the salaries will go up by 10-20% every year? A 50 lacs Apt will fetch only a rent of 10,000 and it’s not going to increase. Does it make any sense at all to buy at these prices?

    Comment by Neo — July 13, 2008 @ 8:15 am

  52. I would like to point attention to two recent comments on this blog.

    1. Appalling to find apts listed at Rs.1 cr with no basic infrastructure in place
    2. In Sydney/Melbourne prices being Rs.9 lacs for income levels of Rs.25 lacs

    To all those appalled at Rs.1 cr apts, this is what I have to say. Rs.1 cr certainly should not be the median or even average price of an apt in India. This should certainly be a matter of concern. However, I predict the following trend over the next several years which will reduce total cost of ownership (TCO).

    contd…..

    Comment by Ashish Abrol — July 13, 2008 @ 10:53 pm

  53. contd…..

    1.On average, apartment sizes will get smaller (see my very first post on apartment sizes at http://www.meridharti.com). This means the total cost of ownership (TCO) will fall. However, do not confuse that with falling prices since psf rates will continue to rise. Infact, smaller apt. sizes will fetch a premium (again I have explained this on my very first blog post).

    2. “No frills” apartments will become a reality rather than a rarity. This will again reduce TCO but don’t confuse this with falling psf prices either. Make sure you make an apples to apples comparison. Cheaper doesn’t necessarily mean prices have fallen-see if you are getting same facilities, specifications and build quality.

    contd…

    Comment by Ashish Abrol — July 13, 2008 @ 11:16 pm

  54. 3. Regulation will force builders to quote prices on carpet area rather than super built up area. Read my post dated 28th May,08 on this topic at my blog http://www.meridharti.com.

    4. Infrastructure will have to be created through funds raised through additional taxes.
    As an example, in the US infrastructure is far superior to what we have in India. However, dig deeper and you can find the reasons why. In the US, annual property taxes could range between 1-1.7% p.a of property value. In Delhi, for a property with a market value of Rs.4 crores ($1 Mi), the annual taxes are Rs.15,000 (0.04% of property value!). It is easy to see why there is no infrastructure in India. In economics, there is no free lunch. Therefore, I predict property taxes going up substantially over next few years.

    Later,
    Ashish Abrol

    Comment by Ashish Abrol — July 13, 2008 @ 11:17 pm

  55. As I had pointed out before, claiming infrastructure is not present in India because property taxes are low is quite misleading. There is no “stamp duty” in USA, and people do not pay 11-14% of the house price after purchasing a house in USA. The “stamp duty” in India, which is a substantial sum, goes to the state government to provide infrastructure, and is a lumpsum form of a property tax. If property taxes were to go up in India substantially, then “stamp duty” should be eliminated or sharply reduced. Else, this is equivalent to saying that people need to pay more for infrastructure in India than USA, which is clearly absurd.

    Comment by Observer — July 15, 2008 @ 9:03 pm

  56. Yes, I believe we’ve had this discussion before on this blog. You are absoloutely right about stamp duty charges in India being much higher than in US. In India, stamp duty is a state subject (like US) and it varies between 7% (Delhi) to 13% (Orissa). Further, it varies for females and males (females is lower). Let’s compare this with US.

    1. Let’s assume an average tax in US of 1.25% of property value. Therefore, in the US, the govt. would recover the equivalent of 7% stamp duty in 5.6 yrs (let’s say 6 yrs) and the equivalent of 13% in 10.4 yrs (let’s say 11 yrs). Now, take the example of well established cities (not new developments like Gurgaon or even Bangalore which has seen significant new development) like Mumbai & Delhi. Imagine, Dadar and Colaba and Greater Kailash & Vasant Vihar. Many of these apartments are 30-50 yrs old. No tax has been collected on them for probably last 20 yrs (or more). Where will the infrastructure come from!?!

    2. If you create a new apartment today (tax is calculated on circle rate determined by govt) in an area with a circle rate of Rs.4000psf. Let’s say it’s a 2000 sq ft apt. Therefore value is Rs.80 lacs. Assume 10% stamp duty-this translates to Rs.8 lacs-this is the tax for life! In the US, they would collect that over 8 yrs (at 1.25%) and more importantly assume prices (circle rate) are revalued every 3 years. Assume 5% appreciation y-o-y. This means in year 8, the circle rate of this apartment will be Rs.1.18 cr!! Now, calculate 1.25% of Rs.1.18 cr=Rs.1.48 lacs (this translates to 1.85% of 80 lacs!).

    Therefore, the effective tax in year 8 could be as high as 1.85% of original purchase price where as in year 8 India will have no equivalent tax being applied to infra development.

    Do you see the problem?

    Later,
    Ashish Abrol

    Comment by Ashish Abrol — July 16, 2008 @ 3:40 am

  57. Again, the above claim that the stamp duty is collected only once for the lifetime of the house is misleading. The stamp duty is collected on the registered property price every time the house is sold! The above claim is only valid if the person who bought the house originally stays for the rest of his or her life in the same house. With increasing professional mobility, I believe this may not hold true for a significant section of the population. If we assume people transfer every ten to fifteen years, then the above claim fails right away.

    Also, mathematically speaking, a 12% lumpsum payment is not equivalent to 1.25% being collected for 8-9 years. Any organization, with even a rudimentary understanding of economics, would optimize the usage of the lumpsum amount. Assuming that RBI bonds pay 8.5% in capitalized interest, which would accrue interest free to the state govt, the state govt can deposit the lumpsum amount with Govt bonds, and spend the equivalent of 1.25% for infrastructure every year for almost 21 years! Even school children learn this in their mathematics classes.

    Also, in the case of the US, property taxes can be deducted from the federal income taxes if one itemizes deductions. I do not think stamp duty can be deducted on Form 16 to be filed with the Central Govt in India. If not, it makes effective property taxes in USA somewhat lower than 1.25% in the example above, which would make the equivalent lumpsum amount last for almost 25-30 years!

    I think mismanagement, corruption, poor efficiency of utilization, and other inefficiencies are responsible for the shoddy state of infrastructure in India today, not purportedly low property taxes.

    Comment by Observer — July 16, 2008 @ 8:30 am

  58. I just did a quick calculation based on the following figures. Assuming the stamp duty paid is 12% of the house price, which is deposited in RBI bonds at 8.5% interest, and 1.05% of this amount is spent on infrastructure development every year, the amount paid as stamp duty should last for almost 45 years! Even though average house prices in India before the boom were 1/5th the prices of an average US home, labor costs in India are also much lower than in the US. So, why is the infrastructure in India vastly inferior to those in developed countries like the USA? Where is the stamp duty money going?

    Comment by Observer — July 16, 2008 @ 8:48 am

  59. Ur right about the fact that stamp duty is collected at every transaction. However, don’t u think it is dangerous to plan capital outlays or other infrastructural improvements without a certainity of revenue inflows? My comment is based on ur argument that Indians are getting more mobile and therefore there will be more frequent transactions resulting in govt collecting multiple stamp duty on a given property.I agree that as more and more cities emerge as employment centers, mobility will increase and your assumption will play out to a certain extent. However, to base your future capital outlay plans on an assumption is dangerous. Moreover, the richer the neigborhood (eg. city centre properties in Napean Sea Road or Malabar Hill in Mumbai) the lesser the chances of sale. The real upper end of scociety does not sell (even though they may move) and retains a property for generations. Imagine, no tax collections in the best neigborhoods……guess what happens next?

    contd…..

    Comment by Ashish Abrol — July 17, 2008 @ 12:13 am

  60. what happens next is what has been happening for decades and will continue to happen unless the system changes. In the rich neigborhoods reside the influential (film stars, politicians, industrialists, etc). They ensure money is diverted from other parts to maintain infrastructure in their neigborhood. The middle class subsidising the rich ! I feel this system of taxation is seriously flawed and needs to be revamped for effectiveness very soon.

    Moreover, thank you for taking me back to school. You refreshed my understanding of time value of money. I’m not sure if you know but the RBI bonds are a drain for the Indian govt. The bonds were paying 8.5% ROI two years ago when deposit rates for 5 yrs were 6-6.5%!! Moreover, this was govt risk compared to banks and therefore there should have been a negative spread. Moreover, these were tax free. Therefore, on a post tax basis (@25% tax rate) in a bank deposit (SBI) one would earn 4.875% as opposed to 11.33% in RBI bonds. Wow! Great economics. Now, what you are suggesting is that the govt. extend it’s politically populist and economically flawed policy to itself !! In other words, it should take the money from the people and pay itself 8.5% ROI tax free. In essence, the govt is borrowing money from the people at 11.33% when it can easily raise capital through issuing govt securities at 6% (i’m not sure what the rates are exactly) !!

    contd….

    Comment by Ashish Abrol — July 17, 2008 @ 12:30 am

  61. Please be sure that the idea of this discussion is not to prove anyone wrong or right. I’m just trying to highlight the flaws in the system for collecting property taxes. As educated Indians, I feel, it is our responsibility to understand the challenges facing our govt and asist them in formulating policy to change the status quo. It is not going to be possible if we continue to blame the govt. for all the ills while we clearly know we are infact not paying the amount of taxes being paid in the developed world.

    later,
    Ashish Abrol

    Comment by Ashish Abrol — July 17, 2008 @ 1:15 am

  62. As I have shown above, it is untrue to claim that Indians pay significantly lower property taxes than in developed countries. Indians pay a fairly substantial lumpsum amount, which needs to be properly managed fiscally for infrastructure development.

    Comment by Observer — July 17, 2008 @ 9:14 am

  63. This is from ET-the murmurs have started.
    ____________________________________________________________________

    COIMBATORE: The Southern India Engineering Manufacturers’ Association (SIEMA) has strongly objected to the proposal of the City Corporation to increase the property tax by around 150 per cent for industrial buildings, which it termed as ‘very abnormal and unethical.’

    The very survival of pumps, motors and textile machinery manufacturers was in doubt due to abnormal and frequent increase in prices of major raw materials like pig iron, coke, aluminium and steel and announcement of hike in property tax was another burden, adding fuel to fire, SIEMA said.

    In a representation to the Corporation Commissioner, SIEMA president, C R Shanmughasundaram said ‘the industry here also suffers from production loss due to frequent power shutdown and competition with inferior quality pump manufacturers in the domestic market.’

    SIEMA suggested authorities to consider issues like age of building and type of the construction, location, level of pollution from the industry, wastages, usage of electricity, outlet of waste and traffic problem, before fixing the property tax.

    Instead of increasing it by 150 per cent in five years, the Corporation may consider increasing the tax by five percent every year, it added.

    Comment by Ashish Abrol — July 17, 2008 @ 7:52 pm

  64. Wow, have patiently read all this comments as i too am a choiceless/forced victim of this phenomenon and find disgusting to come to terms with the fact that we Indians spend much much more than an Amercian for almost about everything. \

    Could someone explain..what role does banks and financers have in regulating this bubble. I mean these ICICI and HDFC’s blindly finance worthless properties to even more worthless consumers. In what hope does banks do it.

    Comment by Loknath — July 30, 2008 @ 4:05 pm

  65. I may have to split my comments in two parts:

    The banks and financial institutions have no role in regulating this bubble situation. They however play a big part in creating and fuelling this bubble. Only a central bank/ RBI has a regulatory function by intervening with contractionary measures when the economy overheats and inflation is flying high.

    The Banks and Financiers are much in competition against each other. They have been and will always be. The top executives working for these institutions have only one driving motive –to outsell the other – ie to make huge short term profits – it eventually converts into the big bonuses they receive which are closely tied to the yearly profit statements the institutions issue out each year. (To put it in perspective, a CEO may have his bonus fixed at between 0.5% to 1% of the net annual profit. For $1 bn profit that converts to $5m to $10 m bonus). Most often than not, there is always a hidden agenda on the part of those who are responsible for running these institutions. Therefore, even if the fundamentals behind their operational strategies may be weak, these institutions will continue to fuel the apparent misleading growth in hot sectors such as the current property market in India. And who cares if these institutions are overexposed and end up busting, well the top guys have made their bucks and cruising in their luxury boats in the cool carribean.

    Indian property market, at present, is like a pressure cooker that has most definitely superheated and with no provision for safety valves, is about to explode with a big BANG. And when it does, the casualty will be far and wide. And any one who supports further investments into this explosive market, most certainly has vested interest.

    For any growth to be sustainable, the primary driving fundamentals need to be valid. And that applies to property market. The following excerpts taken from a source in Australia may help explain it in simple terms. In particular, pay attention to the “Strawberry box principle”. This article was published after the property market crash of Sydney, Australia where some properties sold for a third of their boom prices!!

    “……..Two of the best ways to “predict” what will happen with property prices are affordability and yield.

    When affordability (the percentage of the average income spent on the average mortgage payment) starts to exceed 25 per cent of a family’s income, properties are starting to exceed their true value. It’s the time to be very careful.

    Of course, in a property boom, caution is a spurned virtue. The terrible investing twins, greed and fear, become the driving forces which often take prices to absurd (read ‘over-valued’) heights.

    The prudent are labelled fools as mesmerised families commit themselves past the 30 per cent affordability level. In Sydney, in the silly height of the boom, many reckless families committed themselves for more than forty per cent of their income in repayments. This was madness.

    Now, let’s use some common sense (not very common in property booms) to ask a simple question:

    How can prices keep rising by 20 per cent if incomes are only rising by 5 per cent?

    Answer: They can’t.

    It’s impossible for buyers to keep buying what they can’t afford.

    The people who underpin any property market are the first-home buyers. When the numbers of first home-buyers falls (and the headlines say that young couples will never be able to buy a home) it’s like taking the piers out from under a home. The foundations grow weak. The market either falls down badly or remains stagnant until the foundations are repaired.

    In other words, property prices must fall or, at the very least remain stagnant for a long period until such time as wages rise so that first-home buyers can again afford to enter the market.

    It really upsets me when I see agents and spruikers telling first-time buyers that they have to “get in quick” because prices will never fall. Such stupid self-serving advice is what causes thousands of young couples to dangerously over-commit themselves. It’s advice that quite literally ruins lives.

    I want to tell all first-home buyers not to over-commit themselves for more than 25 per cent of their incomes and that if they can’t buy a home now without over-committing themselves then they should take one of three actions.

    First, wait until prices fall. Or if that doesn’t happen, the second option is to wait until their incomes rise or, third, look for a home in a cheaper area.

    The way the property market is today, I believe that buyers are going to be in an increasingly stronger position. Buyers, after all, are the ones with the money. And the person with the money is the ultimate decider of the level of property prices.

    Aside from the affordability factor, yield is an excellent way to predict what can happen with property prices.

    In the major cities today, yields have fallen to as low as three per cent. And that’s a gross return.

    Most buyers – especially first time investors – greatly underestimate the costs of holding properties. A three per cent gross return can quickly become a zero return.

    So, again, here’s a common sense question: Why would anybody buy property that produces a near-zero return? Answer: Because they are hoping for capital gain.

    Now, although it happens often, such thinking is the pinnacle of investing stupidity.

    It’s what’s often referred to as ‘The Strawberry Box Principle’, in which a box of strawberries keeps being re-sold at ever increasing prices until one of the buyers looks in the box and says, “Hey, these strawberries are rotten.” The answer from the seller is: “Oh, these are not for eating, they are for selling.”

    Yes, to the next sucker.

    It is these ‘Strawberry Box’ properties that I believe will, one day, be sold for half the price at which they sold during the peak of a boom.

    As we have just seen, during a boom, prices get over-inflated – madness makes affordability levels get too high and investment yields too low.

    But when slick spruikers, dodgy developers and audacious agents are added to the madness it means disaster for property buyers. These are the property buyers that are going to be the biggest losers in the months and years ahead when they become property sellers.

    The buyers who are standing underneath them are going to be the ones who will pick up some real bargains – and I predict that there will be some properties selling for up to half their boom time prices.

    Why is it that we are so quick to believe that all property prices can double in value but refuse to even consider that these properties could halve in value?

    Because, so often, we go mad over property…….”

    Comment by A curious Observer — August 1, 2008 @ 11:49 am

  66. One thing missing from all the above discussion is the topic of attitude. Without a shred of doubt NRI’s have fueled the property boom in India for couple of decades. But the attitude of locals is to “stick it to them”. This happens at so many levels that it’s not worth going into in this space. Sooner or later, the NRIs will stick it back to the locals. They will walk away and leave the boom a bust. I feel we are close to that tripping point.

    Comment by Ramesh — August 2, 2008 @ 5:36 am

  67. Gaicula, Voyager and Ramesh,
    Excellent comments. You guys seem to have good blend of practical and Economics fundamentals.
    I am a stock market investor in the US, have some interest in ETFs and closed end funds holding Indian equities too. I have avoided Indian RE in my portfio for the same reason.
    An about 5 to 10 times price increase since 2003 just doesnt make sense, and it has to do with the global money rotation. Being an investor, I keep looking for fundamentals which will help understand future trends better. I am afraid Indian “growth” is part of a broader global phenomenon, which has to do with global money rotation. Current global inflation is the result of same. USD chasing foreign investments. Once this growth starts slowing down (when interest rates go up which has started already), real estate will fall, and could fall hard in some regions. Like Voyager pointed out, he is a top 5% and cant think of buying Apt in Pune. Think of a small farmer or small businessman in town, he is in worst situation than yours. So the demand supply equation will self correct the market !

    Comment by ST — August 4, 2008 @ 12:27 am

  68. A lot of good comments in this blog. The bubble in India is the result of the most absurd appreciation of land and home values in the past several years. Isn’t it so ironic that most homeowners in the so called “rich” USA cannot afford to buy an equivalent house in an equivalent city in India? The media in the USA has self-destructed the US housing market by terming as a bubble what was essentially a tripling of home prices over TWENTY years in the coastal areas. In most of the USA, home prices have not even doubled in the last TWENTY years, which makes it a very poor investment. And yet, the media in the USA has convinced the whole world that there was this big bubble there and so a correction now is justified. Compare that to the appreciation seen in India and what the media does there. Land prices have gone up 10 to 100 times in the past 20 years, and even apartment prices have multiplied several times. The depreciation of the rupee cannot be used as an excuse, as the rupee has actually been strong against the dollar in recent years. Population density did not increase all of a sudden, and even though IT and Financial jobs are paying a lot now, the average annual Indian per capita income is still only about Rs. 50000.00, even in the metros. So how is it that the average house in the metros is now at least worth about a hundred times the per capita income? In the USA, even in the “hot” metros, median home prices are less than 10 times the median annual income. The media in India continues to hype up property, and everybody is so convinced that prices will forever go up. Like somebody said on this blog, the locals have fooled the NRIs by making them pay a lot for absolutely worthless property. The NRIs have also played the ponzi game by becoming greedy and looking for quick profits. Since the source of funds for this game is completely from outside India, when these outside sources can no longer afford to pay for these inflated salaries and bloated up home prices, the game ends and there will be a lot of losers. I see a very bleak future for India, not because of the real estate bubble, but because of its currently despicable work culture amongst its young population. When guys and girls coming out of below average colleges are offered high salaries for simple jobs, there is little motivation for them to work harder and do anything better. It will lead to a very lazy generation, with collapsing moral values, besides the real estate and economic collapse.

    Comment by sooth_sayer — August 4, 2008 @ 9:01 pm

  69. Let’s look at the strawbery box principle and if it applies to Indian RE markets.

    The strawbery box principle-The article certainly makes for an intersting read and clearly succeeds in creating fear amongst the reader. However, on further dissection, you may notice that the entire article uses only two substantative numbers to make a point (whatever that point is) -(a)3% yield on rentals is too low and, (b)don’t use more than 25% of income on paying your monthly mortgage. I agree with both the points. However, this is where I differ.

    Let’s look at the Pune market based on data available on axiomestates.com. Lised on axiomestates are 9 projects varying in price from Rs.25.5 lacs to Rs.1 cr (with 6 options available under Rs.40 lacs). I’m trying to understand if that price is really too high to afford. Personally, I don’t think so and this is why. To be able to afford an apartment of Rs.30 lacs (2BR’s), one needs to have an annual income of about Rs.9 lacs (approx. 1/3rd of cost of apartment). Anyone in the IT industry with about 8 years experience and a graduate degree gets that salary. With 8 years experience, one’s age is about 30 years. Now, if a middle class person can afford a starter apartment at the age of 30 years, I don’t think the prices are unrealistic. I’ll leave it to the readers to decide and comment.

    Comment by Ashish Abrol — August 4, 2008 @ 9:31 pm

  70. Ashish, You cannot quote the salary of IT employees to justify this, as by that fallacious argument, anything could be justified anywhere in the world. What percent of the Pune population works in the IT industry? What is the per capita income of Pune? What is the median apartment (yuck, not even a real house) price in Pune? How many households exist in Pune and what is the number of houses in Pune? Find the honest answer to those and then calculate the multiple of apartment price to per capita income/demand and supply numbers.

    Comment by sooth_sayer — August 5, 2008 @ 12:32 am

  71. whatever is said about IT ppl and whatever other people perceive of IT guys is 1000% correct. I am a decently paid IT guy too and theres no hiding from the fact that its these IT jonkers who have single-handedly screwed the realty prices making it unaffordable for themselves and other better and useful people in the society too. Though IT incomes could be marginally higher on the average but buyers of properties are largely the IT animals. Take any place in Pune- Aundh, Kalyani nagar, Kothrud, Hadapsar and the sickening place Pimple saudagar where i live, these were @Rs.400-700 psqft in 2005 by those times standards it was 1-2 years of incomes of decent professionals. Now even the ugliest of properties cost Rs. 3000-5000 psqft.. and this is for those apartments which had no qualified engineer or an architect to even design and supervise the construction. These apartments are still made by archaic formworks by some experienced “masons” turned engineers. God forbid, an earthquake of 7.0 and voila, i bet more than 50% will collapse. I have been a victim of 2001 gujarat earthquakes and its no wonder the buildings that collapsed had faulty designs, cheap bricks (they arent even baked in the kiln for 72 hrs.. so much demand you see), pulverized sandstones. (wheres the sand) and uncured slabs (construction time = money). so guys the conclusion is..
    even if you can afford dont buy it. Its worth spending the EMI’s on wine, women and bbq, that would fuel a much fatser growth of economy and we would end up richer still.

    Comment by Loknath — August 5, 2008 @ 11:17 am

  72. Sooth_sayer, If salaries of the buying population is not a relevant criteria to determine affordability, I’m not sure what should be? I do not have answers to all the questions u have asked but it appears u do. Therefore, why don’t you share some of the statistics available with you? I would like to be enlightened about the excess supply in Pune. I tend to trust numbers. If you have numbers to support your argument, i’d love to be educated. However, based on the strawbery box in Australia principle…….I’m a reluctant convert.

    Comment by Ashish Abrol — August 5, 2008 @ 9:22 pm

  73. “Now, if a middle class person can afford a starter apartment at the age of 30 years, I don’t think the prices are unrealistic.”

    A middle class person in Pune earns 9 lakhs/annum? Is this the city of Pune in India? It is very clear that investors and builders are targeting the IT/ITES/BPO/NRI types. The median income in Pune is 8,000 Rupees/month per household:

    http://cities.expressindia.com/fullstory.php?newsid=194461

    Even if we double that figure to account for extra sources of income, the average Puneite can only afford an apartment costing 7-8 lakhs. Assuming a small 800 sq.ft apartment size (super built up area), the per square foot rate works out to be approximately 1000 Rs/sq ft. These rates actually existed approximately 5-6 years ago in many parts of Pune.

    People are beginning to wise up. Price rise is something that really upsets people, and can topple govts. In the next major state elections, I am sure this will come up as an issue. Even Govt control in the form of laws against investors and builders cannot be ruled out. Already the central Govt is proposing a rule that a house must be constructed within a year on newly purchased land. Investors are going to be squeezed out of the system gradually, and the market will become end-user driven. When that happens, housing costs are definitely going to fall.

    Already the IT industry is facing problems because of the rising cost of wages and infrastructure in India. It would be foolish to assume that wages will continue going up in the IT industry at 10% or more for many years. The profit margin of IT companies is shrinking and is now less than 25%. If overall costs including real estate/wages were to go up by another 30%, then India will lose its cost advantage, and the IT industry will be severely affected. Job security is disappearing fast. What will happen then to real estate is then quite obvious.

    Real estate prices in India are heavily dependent on one sector of the economy. All imbalances eventually correct. History has always shown this to be true.

    Comment by Observer — August 6, 2008 @ 1:02 pm

  74. Observer, thanks for chipping in with those comments and addressing Ashish’s false pretence of ignorance of Pune’s or any other of India’s real and ridiculous stats. I have seen Ashish’s blog and think he is really smart and passionate in what he is doing and has made a lot of great investments in the past few years. However, all good things must come to an end, and even Ashish will or has already realized this, and is only trying to keep the boat afloat for as long as he can. I am not even sure if any company in the USA outsourcing to India makes any money currently, as it takes 3-4 persons in the outsourced world to do the job of one person in the USA. With increasing IT salaries in India combined with the sheer lack of competence, it is a perfect storm to sink the ship. 90% of the population can ride on the success of the other 10% for only a while. Mark my earlier post about the coming dark age in India because of the collapsing social fabric.

    Comment by sooth_sayer — August 7, 2008 @ 8:43 am

  75. Well said!
    Unfortunately, if you read the media in India,you will think India is just on the verge of being a superpower! I wonder what will happen when the “growth story music” stops. Too many people have suddenly got too much (undeserved) money. When the inflows stop, coupled with the bad habit of earning easy money, I do not how all this may pan out.
    The “real estate boom” is just one aspect of all this.

    Comment by Cool Head — August 8, 2008 @ 12:11 pm

  76. All said and done well…..

    I agree with the Observer and terrified with the thought of Cool Head.

    However the fact at the moment for Pune is that Builders have ego issue reducing the prices. They are not going to reduce the prices even if the market crashes vertically !!! They are ready to sell their companies and be bankrupt but are not ready to bring down the prices. In fact, I have seen few of them have increased the price in last 15 days. Example: Mirchandani Palms in Pimple Saudagar is quoting 3600/- psqft. I just came out of his office without further discussion !!!

    “Sir kata sakte hain leking sir jhuka sakte nahin !!!’.

    Jai Shivaji. Jai Maharashtra.

    Comment by Atul — August 8, 2008 @ 6:07 pm

  77. One way around this might be to form a consumer-led builder’s association. A group of consumers should get together, and then register themselves as a non-profit trust. Identifying land, purchasing the land, and the constructing apartments on the land could be carried out by hiring some professionals like lawyers, contractors, and managers. This should remove the profit margin component, and prices could be lower by 20-30% if handled this way. Of course, this calls for spending a significant amount of time by each of the trustees, but the savings should be worth it.

    To achieve economies of scale, at least 30-40 people should get together to start this effort.

    Comment by Observer — August 8, 2008 @ 8:03 pm

  78. Oberver, this was how houses and apartments used to be built earlier. In the earlier days, people of a community or working in a company, used to pool together resources, form a society, THEN buy land and construct a colony.
    In fact, our first apartment where I used to stay as a kid, was built in such a way, in Mumbai.
    Sometime around the late 1970s-1980s the “builder” as an animal came into the picture, followed by goons, followed by dubious politicians and as they say, the rest is history. You will not find such an unholy nexus anywhere in the world, maybe not even in Sicily!

    Comment by Cool Head — August 8, 2008 @ 11:00 pm

  79. Hotels have been making enormous profits, as part of the real estate industry, over the last 3 years. Room tariffs have risen by 300% in the last 4 years. Isn’t it surprising that a room in a place like Pune (Hotel Holiday Innn) costs almost $300/night, while the same in a medium size US tech city like Seattle costs $120 which also has a population of 3 million? At least when you open the window of your hotel room in Seattle, you will not see a line of brown asses ready to defecate, nor will you smell the wonderful toxic aroma that wafts your way. How come the third world is more expensive than a developed country like the US?

    The politicians/builders lobby has amassed unimaginable wealth on the backs of all those hard-working techies who are slogging for 14-15 hours a day spoiling their health. One of the greatest wealth transfers in the history of India.

    Check the following link for the sordid profiteering by the hotel/builder lobby in India.

    http://economictimes.indiatimes.com/articleshow_v2/3308172.cms

    Comment by Observer — August 9, 2008 @ 3:49 pm

  80. Why do we as Indians continue to balk at capitalism when it is practised by Indian entrepreneurs? On the flip side, we are happy to extol the virtues of entrpreneurship in the West, especially in the US? What is wrong if the Indian hotel industry has had a run up in ARR’s over the last 3-5 years? Are they compelling anyone to stay at these hotels and pay these exorbitant prices? No. These ARR’s are a function of supply & demand. Since a lot of new players have entered the industry over the last few years, significant new supply has been added and therefore ARR’s are correcting. Moreover, it is important to keep in mind that hotels where rooms are quoting at $400-$700 p/night are 5 star or 5 star deluxe hotels which earn a lot of foreign currency which helps improve the country’s reserves and strengthens the rupee against other currencies. A matter of pride not shame.

    Regards,
    Ashish Abrol

    Comment by Ashish Abrol — August 11, 2008 @ 9:46 am

  81. I think the style of capitalism practiced in India is called crony capitalism. Where prominent builders form a cartel, with significant kickbacks to the politicians, who themselves may have a share in the profits. It is not a transparent system unlike in developed countries. Hence, Indians in general have a right to be wary of the motives of the industry. Why should Indians not enjoy “export quality” goods and services at prices lower than what people in other countries pay? Are Indians somehow inferior to people in other countries? Indians should not pay more than people in rich countries for the same goods. This is just wrong, and it means the system is broken. Either artificial shortages are being created by restricting supply by unfair means (licenses, carteliztion, kickbacks, capital restrictions…..), or by poor management practices (bureaucracy, ever-continuing litigation, poor technology…).

    More and more Indians are traveling abroad on holidays and business visits, and are beginning to wonder why hotels with comparable facilities are cheaper in places like USA, Malaysia, Dubai, etc than in India. As awareness rises, hopefully more Indians will demand that these ridiculous imbalances be set right. The investor/builder/politician nexus needs to be broken sooner rather than later.

    Comment by Observer — August 11, 2008 @ 1:57 pm

  82. Forming opinions based on perception is dangerous. I feel it is a self fulfilling fallacy. I’m not sure who has the evidence of investor-builder-politician nexus? and let’s say for a moment there is a nexus. In such a scenario, can you explain how this nexus will help drive up prices?

    In the meantime, I’ll take a stab at addressing your concern about high hotel average room rates (ARR’s). The rates are high for following reasons:

    1. There is a supplly demand mismatch. As the economy took off in 2003, the supply of rooms was not enough to meet demand in short term. Govt. gave some tax incentives to developers to get into hospitality, lots of them rushed in and now we might be seeing an oversupply soon. That is why ARR”s were high and are now correcting.

    2. When you compare hotel room rates, we need to compatre like to like. An equivalent of Le Meridien in Pune is not a Holiday Inn in Hartford (just an example) but a Le Meridien in Miami or Atlanta. Compare a Taj with Hilton and not Holiday Inn for example. When you make such a comparison, you will realise rates are comparable. India may still be higher in some cases but that supply-demand mismatch will get corrected in most big cities by 2010.

    Let’s not always feel like victims. In some cases we are victims of the govt but not always. Let’s try and be part of the solution.

    Comment by Ashish Abrol — August 11, 2008 @ 7:09 pm

  83. Someone living in India who claims there is no politician-builder nexus is definitely part of the real estate lobby. Regarding my original post regarding hotel rates, here are some comparisons of equivalent hotels in Pune and Seattle. This was obtained with a cursory search on http://www.starwoodhotels.com, the parent company of Le-Meridien/Westin group of hotels.

    Westin/Le-Meridien in Pune : Starting at Rs. 12,500 for September 08 = approx USD 300
    Westin/Le-Meridien in Miami, Chicago, Seattle (with similar population as Pune) : Varies from USD 149-210

    Someone who is not able to do the simple comparison above, which takes only a few seconds, is clearly a part of the real estate lobby with an obvious agenda. It is beyond incredible that rooms in the same class of hotels in India cost 40-50% more than in the US, with its vastly superior infrastructure. The value for money proposition is severely distorted. The statement that one should not feel like a victim, could only come from someone allied with the predators (the real estate lobby). Most Indians are definitely victims of this lobby.

    At the last meeting of the Pune Builders Association in Koregaon Park in May, there was an implicit threat to boycott any builder who lowers rates. In the US, this would attract an anti-trust investigation and would be considered illegal. By illegally restricting competition, the real estate market is distorted. I hope Indians/NRIs become part of the solution by becoming wiser and refuse to buy at these enormously inflated prices in India, and continue to rent until things come back down to reality. Given that the rental yield is quite low (less than 5% in many cases), this would be a prudent move.

    Comment by Observer — August 13, 2008 @ 10:19 am

  84. Why only Seattle. Compare any other city, even in the developed part of Asia. You can rent a fantastic 5 star suite in Shanghai’s swank Nanjing Road area for under $ 150 US. Shanghai infrastructure and swankiness is waaaaay above anything like Pune. Thos who have visited both places can see for themselves.

    Comment by Cool Head — August 13, 2008 @ 3:24 pm

  85. I saw this interesting post on indiahousingbubble.blogspot.com
    ______________________________________________________________________________________________________________________

    A “right” advice for many in the IT/ITES/BPO/KPO industries might be the following. After all these “investors” and builders are targeting you guys only. I would recommend the following strategy until annual rental yields approach 10%, which would indicate that housing is no longer significantly overpriced.

    Why do I say that focusing on average rental yield is better? This is because focusing on your personal income alone may not make sense. If you can afford a house with an EMI of less than 30% of your income, it may seem advisable to purchase an apartment/house. However, there is no guarantee that you will be continuously employed for 20 years at the same or higher salary. In the case of a job loss, it would be possible to rent out the place, while you move to a different city, or move in back with family till you land another good job. And if the average rental yields are of the order of 10% or so, it should be fairly close to the EMI, because long term housing loan interest rates are usually between 8-12%.

    So it would be better to look at the average prevailing rental yields in addition to personal income before deciding whether to purchase an apartment or not.

    1. If you are single, stay with friends close to work, and start saving money in an SIP with a reputable balanced Mutual Fund. Due to the ELSS scheme, you get a tax benefit. At this period in life, you can afford to take on more risk. Equity is the only asset class which has shown worldwide to appreciate significantly above the rate of inflation. Housing, Gold, and commodities have roughly appreciated at the rate of inflation. These are basically inflation-hedges. By sharing an apartment with friends and staying close to work, you can save more money on utilities, food, transportation and other expenses.

    2. After getting married, if the average rental yield is approaching 8-10%, and you have a few years experience and a somewhat senior position, then go ahead and buy an apartment. Even if you lose your job, it will be easier for you to find a job since you will have experience, and you can also rent out your place to cover a substantial portion of your EMI. Also, take out a term life insurance policy with a value equal to the nominal loan amount, and a mediclaim policy to protect your family from a catastrophe.

    3. However, if you get married, and the average annual rental yield is still very low, just rent an apartment with your spouse, and stash the money away in a less aggressive balanced mutual fund. Keep renting for as long as the rental yield is substantially lower than 10%. It also gives you flexibility to move whenever you get a better opportunity. Having to put up with a landlord is definitely painful, but if you take good care of the house, and keep good relations, it may not be so bad. Use the accumulated savings as a down payment to buy an apartment when the annual rental yield approaches 10%. Take a term life insurance policy for the lower home loan value, and a mediclaim policy as noted above.

    4. Worst case scenario, where the rental yields never approach 10%. Keep renting till your child reaches 17 when he or she will be off to college. By that time, you will have accumulated a substantial sum of money, even though having to move as a tenant every few years is a pain. Use that sum of money to buy an apartment/house in a small town with no IT exposure and plan to make that your retirement home. Maybe if you have enough money left over, you can even start your own business.

    In another 20-30 years, I think it would be safe to say that all the major facilities like communications, good power supply, hospitals, and shopping areas will be present in almost all small towns in India. So it may make sense to retire there happily, instead of slaving away for the rest of your working life to help make more and more profits for investors and builders and politicians.

    Comment by Observer — August 14, 2008 @ 2:43 pm

  86. I agree to comments made about property prices in india and specficaaly in Pune, the prices have increased way too high. It is going to cause social/financial problems for next few years to come, as the income levels have to catch up with the prices. I would expect the prices to fall minimum 50% to be at realistic levels. Because some people are making money at some levels unnecessary and this has to be factored in.

    Comment by Amol Salunke — August 17, 2008 @ 8:20 pm

  87. Amin !!!!

    May your wish come true, Amol.

    The question is – WHEN??????

    Comment by Atul — August 19, 2008 @ 6:18 pm

  88. The question is not when! It is already happening. Just look around and you’ll find loads of properties unable to be offloaded for sale. The rising property stock level and falling uptake by the consumers has already caused the property prices to fall by up to 20-30% in some places. So here comes the big BANG we have been expecting. The message has been loud and clear all along ie the property sector growth has been simply way unsustainable. The strawberry box has been way overpriced….several times over, and everyone is going to look at the rotten strawberries and maybe decide to buy it for what it’s worth ie just the box (not the contents)!!

    Comment by A curious Observer — August 21, 2008 @ 7:28 am

  89. In chennai, till date, there is no correction in the land prices. Everybody taking about the correction, but in reality there is no correction.

    Only thing is the speculators have gone out from the market. In the last six months, there is no buyer or seller ( may be only few).

    Hence in which place this 20 – 30% correction has happened

    Since I am also waiting to buy the land expecting minimum of 40% correction from the present place

    Comment by R. Yuvaraj — August 22, 2008 @ 3:47 pm

  90. Observer:

    You must be right !!! However….

    The scenario right now is that there are more sellers and few buyers. But Sellers do have higher expectations, buyers reject to deal. The proces is stalled !!!

    In Pune, the process is stalled since last 3-4 months. I know many investors who are trying to sell their flats, but are not been able to.

    This situation will break only when one of the parties agree to submit. That blink impact is not yet come.

    While there are many buyers sitting on sidelines to get into Real Estate, they are waiting for bottom to start fishing. Unfortunately, the decisive downward trend is not yet started in Pune atleast. So, still the shopping time is far away. It will start only after bottom is formed.

    Comment by Atul — August 22, 2008 @ 4:51 pm

  91. Atul,
    Quite true. The fact that price-fall is not yet apparent in many cities is because of this stalemate between seller-buyer. And don’t expect the price drop coming from the builders-sellers. An important point to note is the builder-sellers’ cartel. A cartel works successfully to help keep the prices inflated….. provided there’s ever increasing ongoing demand for the product… eg oil. But if there is no apparently urgent demand then the cartel forces cease to operate. This is exactly what we are about to witness in the Indian property sector. The builders’ cartel will soon weaken as the time progresses and its’ members begin to default on their debt loans, which is inevitable as they cannot sit on their property stock for too long, it being dead money.

    It’s easy to understand why the speculators who invested heavily at the up-end of the cycle are reluctant to sell down, making a loss eventually. These are exactly the people who end up falling hard when the market down-turns. The fact is SOMEONE HAS TO COUNT THEIR LOSSES. It’s a game of gambling. High risk – high returns. Some make their millions and others fade into oblivion. Heart breaking…but ce la vi…

    From Indian perspective, the property market is fundamentally different from the developed west. Whereas in the west, the children leave home (willingly or unwillingly) when they turn 18, there’s no such pressure or incentive in India to do so. And precisely this is the reason why at present the Indian RESIDENT consumers are in no big hurry to buy properties. They all have a place to live and no pressure to leave. Any investor who wisens up now and sells out at a reasonable price will spare himself a great deal of agony in coming months. The writing is in the wall … the Indian property market is about to crash and burn.

    Comment by A curious Observer — August 25, 2008 @ 11:23 am

  92. Observer,

    You are right about cartel. Price drop will only start from individual investors and then will trigger the cartel to bring the prices down. This is when the cartel breaks; they will go for covering their losses.
    Cartels are normally formed for one’s selfish reasons;not for group’s combined benefit. Normally whoever initiated the cartel will be the one who will first try to get out.We are here to see; how many developers are getting bankrupt.I remember seeing during 95-96 seeing ads like buy one flat and get one flat free in Mumbai or Thane. I could not find the proof now. Anyone remembers it ?

    Comment by Kannan — August 26, 2008 @ 12:42 am

  93. Kannan,

    May not be exactly the ‘Buy One Get One’ scenario, but yes, there was a rush to sell properties in Mumbai. Again, not exactly in 95-96, because in 95-96 the property market was at top in Mumbai. I remember this because I bought a flat in Mumbai during 1996. From 98 onwards, the prices started falling down and the by 2001 it was bottomed out. In 2001, when I was trying to sell my flat, I went through a hell experience. For six months, I kept searching for prospective buyer. In six months, only 3 people visited my flat to see it and all rejected it !!! Finally towards the end of 2001, I could get rid of the flat, at a dirt cheap price, almost 50% loss against the price that I bought it in 1996.

    Having such experience, I am very negative at this moment on property market and somewhere in the corner of my mind the clock is ticking. However, there are some hard facts which can not be ignored, especially in Indian conditions.

    1. Every polititian, invariably (to the extend of over confidence), be in power or in opposition, have their own piece of Real Estate investment (Read Land Grabbing). The interests of these polititian is to see that land prices go up regularly. Remember they have Political Power (even when we call ourselves a democratic country, this is the ground reality).

    2. Every Mafia in this country has huge investment (again…. read Land Grabbing) in real estate. These people do have Muscle Power.

    3. Every corporate house and business man in this country has huge real estate investment in this country. They have Money Power.

    4. Against this trio of Political Power, Muscle Power and Money Power, the poor buyer of real estate (IT Guys to the extent of 90% of actual buyers) have small wish that prices come down. Even from these IT guys, about 50% are second home buyers, not being consumer but Investor (read Speculators).

    This situation is something that is concerning me. The future that I can see is that: The prices will Crash (A real hell crash) when this trio will finish releasing their holdings to the poor IT guys and drain the hard earned money to their own pocket. The end of the cycle has already started when these trio have started releasing the holding.

    Comment by Atul — August 26, 2008 @ 10:59 am

  94. Atul,
    I don’t remember which year it was but it was not recently like 1998-2001.

    Normally investors go and buy the property during the boom periods and for the builders it is very easy to push the properties.Since it will be pushed by the above said trio along with the help of media,brainwashing marketing compaign and herd mentality(i would say peer pressure).Individual selling/disposing a RE property is not a simple task; it will take several months and several lower re-valuations before disposing it.

    1)
    During bubble periods,when the investor(a seller or group) wants to dispose a property he assumes that his fundamental valuation has been surpassed and he wants to get out of the investment at one point of time.If the seller cannot find a buyer immediately; he will keep revising the price during the boom periods and which will far exceed the his initial valuation.

    There is other group called buyers; they have the higher valuation for this property and expecting a greter future dividends based price movements during the short term. They assumae that they could find a buyer who will give far superior valuation the same property.When this buyer meets the seller; trade occurs. But there is a time gap between when the seller wants to sell and buyer commits for the transaction; that time period is actually inflating the bubble(1.fundamental valuation- 1st selling price & 2.transaction price-new price & 3.higher future valuation-future selling price).

    2)
    Greater fools theory – it possible for the cartel to mantain the very high price level as long there is supply of fools.Fools money are wanted by everyone and every where.During boom cycles; people with experience meet the peole with money; finally they will exchange money/experience. :)

    3)
    Again, the above said “trio” can influence to greater extent now a days when compared last decade.Now we have a high salaried “growing” class called IT workers they were not in the picture earlier.As long as there are more in take into companies; RE cartel will get the increased supply of fools. Eventhough the IT workers are educated; they are beeing sucked off by the companies for 12-14 hrs and they all are living in their own “high class bubble”.It is a different big story to talk about.We will wait and see.

    4)
    Atleast in US; there is a price index, inventory details and demand forecast etc.Indian RE companies don’t even know exact demand so they would oversupply to a very great extend so the bust will be deeper than US.

    5)
    Still macro economic conditions and real indian deficiency will bust the bubble.Bust is ineveitable and it cannot happen like in stock marlet;it will take time but will be there.When there is demand-supply mismatch;boom and bust are bound to happen many times.

    Comment by Kannan — August 26, 2008 @ 11:20 pm

  95. I want to buy a flat in Gurgaon . Should I wait for some more time for bottom fishing?

    Comment by ghantu — August 29, 2008 @ 4:27 pm

  96. You should wait. There is a potential of slow down as US gets into recession next year.

    Comment by M R Srinivasan — September 9, 2008 @ 5:00 am

  97. http://infotech.indiatimes.com/News/Wipro_gives_pink_slip_to_1000/articleshow/3457294.cms

    This will fuel the real estate crash.

    Comment by VJ — September 9, 2008 @ 9:17 am

  98. News from the last real estate crash 11 years ago.

    http://www.business-standard.com/india/storypage.php?autono=41755

    Comment by Amit — September 9, 2008 @ 9:24 am

  99. It will take a while for the real estate prices in Coimbatore to crash. A combination of factors has led to this boom. The masses learned a new term investment, and they saw real estate as an investment. Inflation was always an issue, and smart people found that they could maintain their wealth by getting hard assets, instead of holding cash. 30 years back a family of six could live with 150 rupees a month in Coimbatore, but today they would need about 30K, which means inflation is about 20% a year. So definitely cash is not something to hold in the long run. But the problem now is that real estate prices have gone 40% per year for the last 5 years in many places. This can be sustained only by external sources like FDI in real estate, black money or to a limited extent by NRIs. NRI influence has been much more limited. Brokers forming a cartel, politicians, business men with black money, and banks hoping to cash in, along with the govt increasing the money supply had succeeded in creating the impression that prices can continue to increase, and lots of fools bought into this illusion. But now the momentum is lost, since the supply of fools is not unlimited. So we will see a drop of atleast 50% from peak prices. In the long run price increase should match the money supply and will be around 20% per year.

    Of course some smart guy could come along and build real cheap houses (like Tata’s Nano for cars), that would bury “real estate as an investment” once and for all.

    Comment by HM — September 12, 2008 @ 8:10 am

  100. Indian real estate market is strong or in indian real estate have no sine of price correction and no any official statement is come from real estate developers which show’s us a bright future of indian real estate market. real estate developers have the fund from black market which makes this sector more strong then US or UK real estate market . today indian economy is fastest growing economy in the world double income tradition is give more strength to all economy sector. Today real estate sector is not driven by developers its driven by a common man who have a lote of money to purchase a overpriced house otherwise this sector is fall before one year but no sine of price down in real estate. I want to tell u a story three months before i was go to indirapuram to search a property for purchase at that time property dealer or builder are tell me the price of a builder flore which is 968 sqft in the rate of 22 to 23 lac this price is over to my pocket after that yesterday i was go to same place to reserch the property and i was shoked to listen the property price As same as builder flore of 968 sqft which is now @ 28 to 30 lac. (these are my personal view , story or comment don’t take any desigion on it)

    Comment by Sundeep verma — September 24, 2008 @ 3:31 am

  101. Sudeep,

    The way you write, anybody can makeout that it is very easy to convince you for anything. The builder, for sure, must have sensed this and quoted you higher price.

    Even during slump of 2001, there were incident in Mumbai where ‘Bhola’ guys were duped to the tune of lacs by builders showing moon on their hands…

    The people like you have contributed considerably to the bubble in Indian Real Estate.

    Comment by Atul — September 24, 2008 @ 5:58 pm

  102. For all those who are still living in denial, here is an eye opener. Attached below is a recent article from Property Times that offers a tiny taste of impending doom for Indian property market. Guys..Wake up..or you’ll be dead meat soon..Make a rational decision about your RE investments. Sell and exit the market, if you can, NOW. Good luck finding a buyer though …

    Property investors in India forced to sell at a loss by global downturn
    Thursday, 25 September 2008

    Indian properties being sold at a lossYoung property investors in India are selling at a loss because they can no longer afford to pay the interest and costs associated with owning multiple properties.

    The global downturn has set off a panic reaction, inducing investors to close deals at losses. It has become almost impossible for those who invested in real estate last year to exit the scene as the downturn has deepened and the prices being quoted do not even cover the purchase costs and interest expenses.

    Typical is 35-year-old Rahul Verma, who works with a Noida-based IT company. He bought a flat in Greater Noida early last year purely as an investment with a bank loan to finance 85% of the cost.

    Since then his EMIs have continuously gone up thanks to a series of rate hikes by the RBI. However, the prices haven’t climbed as expected and the outgoings have made the property expensive. Rahul is now left with the only option of selling at a loss. And given the global economic gloom, he is willing to take a hit.

    ‘Several investors are stuck simply because there hasn’t been enough price appreciation in the past one year,’ said Raheja Developers Chairman of Navin Raheja.

    He said that young investors bought at the peak of the property cycle last year. Many purchased two apartments simultaneously, assuming that they would finance one by selling off the other at a premium. They are now caught in a difficult situation as they bought at a higher market rate and are compelled to service two EMIs.

    Some investors have started defaulting. Others are approaching developers to cancel their bookings and return the money.

    Meanwhile developers are finding it hard to finance projects and banks have started taking proactive measures to prevent defaults in their real estate portfolio by cutting exposure to loans against property.

    State lender Punjab National Bank (PNB) has taken a lead and has stopped giving such loans, while Bank of India, Bank of Baroda and Indian Overseas Bank have decided to go slow on such loans.

    ‘We are discouraging loan against property by refusing to provide overdraft facilities and charging higher margins,’ said a spokesman for Bank of India. Other banks are discouraging such loans by valuing the property at distress level or by valuing the property at the price it was purchased.

    Comment by A curious Observer — September 26, 2008 @ 2:08 pm

  103. Guys, I am writing my first ever post on Internet blogs – the reason being , there has been lot of curiosity around US bail out plan and how it might affect the rest of world economies. In particular, I have been keeping watch on how Indian real estate market are going to unfold in near future.

    Being in the real estate industry and worked in US real estate market, I was actively involved in tracking the Sub prime market. In 2006, when the market begun to face the home price depreciation, I have informed my seniors that it will affect the US economy in near future ,but my views were not greeted well as during those days the Subprime exposure was only 10-20% of total real estate market. Well, I don’t want to go into theory behind the “Fall” nor I want to claim anything on this board, but I would like to talk about the effects of US economy on Indian real estate and will appreciate if you guys can also share your experience and knowledge about the same.

    Now the question is Who’s next? Is it the Indian real estate market, and if so then how the US is going to affect the Indian real estate market. Let me put my 2 cents of knowledge on this board:
    The major players in real estate market are Customers, Lenders, Investors, Regulators and last but not the least the builders (manufacturers).All these players play an important role in reality price to either go south or north. In the booming time, most of them will sail in same boat towards north and won’t be willing to take a downturn as every one will gain profit out of it. What happened in US was a major failure, I can tell you one customer case which I interviewed back in 2007, I was shock to know two things; a worker of fast food restaurant was able to own a house of $250K in San Diego CA ( Irresponsible borrower), and he was able to get loan easily from lender ( Greedy lender ). Another thing which strike me was that he had brought home for investment purpose and expected to sell it at higher rate. Well every thing went fine for him until his ARM loan
    (Adjustable Rate mortgage – A faulty product which wasn’t regulated by regulators) EMI increased from 1% to 8% and he was unable to fulfill his loan and as a result his home was into foreclosure.
    Well, what happened in above case has some similarities to what is happening in Indian real estate market. In India too, there are some customers who had invested in real estate thinking that it will fetch higher returns, in fact they weren’t wrong at all and many of them might have earned their dream returns in past few years. Things were good till the time when all the parties were sailing in same boat, but now with the US downturn, the investors have decided to take south route as they might want to reduce their risk exposure in real estate portfolio. Well I consider this as the onset of slowing down of real estate prices, as many of you will agree with the law of economics, if supply is more than demand then it’s very unlikely for suppliers to hold the same prices as before. Another factor for the downturn is dual effect of inflation, higher rates and a possible slowdown in job market.

    Having said that I don’t have any data to prove the above hypothesis nor I have experience in Indian market, but I am sure that people visiting this blog should be able to add their valuable inputs.

    Lastly, this message have been little longer than what I initially intended to write and I would like to thank you for readinng this message. I would also like to mention that all above comments are my personal and doesn’t target to any individual or organization.

    Comment by Sanjay — October 2, 2008 @ 11:45 pm

  104. I think the fall has already started; a few days ago I attended one of those ‘real estate fairs’ held in Bangalore and the rates quoted in Mysore was Rs 650 per square feet in a location around 15 kms aways from the city. Of course, there is the proverbial bait – almost all plots are sold out and only 5 remain, we were quoting Rs 250 a square feet a year back etc etc.

    My parents live in Mysore and I know for sure that one of their neighbours is trying to sell his plot – located well within the city limits- at Rs 1000 per sq.feet and is not able to do so for the last 3 years !!

    I point this out to the exhibitors and say that nonetheless I would like to have their literature etc etc. They take my email id and say they will send all the relevant information within the next few days.

    Well, you guessed it – I do not hear from them again.

    These guys are looking for suckers essentially and the NRI’s are an easy target!!

    Kamath

    Comment by J.Kamath — October 11, 2008 @ 4:13 pm

  105. I was talking to one of my relative today in M.P. area, he indicated prices for real estate are down 30% to 40% and there are no buyers in the market. No surprises, as the global economy is going thru the worst ever credit crisis. The real question, as always, is where would be the bottom. I personally believe the downfall will be sharper than in developed countries like US, just because the rise was too unrealistic in real estates in India. So we are guessing 20 to 50% in US housing in some pockets, it could very well be more than 100% in some Indian pockets.
    Just a broad estimate! Be ready with some money if you have, to invest in the next cycle 2-3 years from now…I hope!

    Comment by Shyam Tambi — October 11, 2008 @ 9:27 pm

  106. The Real-Estate Bubble in India is Real..and it is not the first time we are experience this..Home prices fell dramitacally in Mumbai in the early 90′s on back of the Soviet collapse..Whats different now is people are financing their homes, back then most home owners owned their homes or at least owned significant equity in thier homes..This time around people with less than stable jobs have burrowed many times their salaries to move away from their parents (a fairly recent trend), they have nothing to gain by staying in their homes if home prices slide or if they lose their jobs..Therefore inventories will soar putting more pressure on home prices..

    India’s Reserve bank is modeled after the Bank of England and has a similar role to the Fed..They will try their best to pump up the markets to create liquidity..first eroding reserves..then using Gold Reserves and finally by printing money..leading to un controlled inflation..so home prices will stabilize but prices of all other commodities will go up signifantly

    There is also a huge disaster waiting to occur in the Credit Card and Auto loan sector..there has been excessive lending in these two sectors, and as the economic woes continue people will stop making payments on these loans..leading to large scale defaults

    Economic trouble in the US will affect India’s outsourcing boom as well..Jobs will be cut..leading the Govt to invest more in Infastructe etc to create employment, but since the Govt really does not have any assets left..it will print mo money..causing mo inflation

    2-Years from now a loaf of bread will be 80-100 Rs…I am using prediction made by Austrain economics about price of wheat (in dollars and using a 50 Rs conversion rate)

    Comment by Rohit — October 16, 2008 @ 10:07 pm

  107. I have recently purchased two properties in Jaipur . one in the commercial market and one agriculture land. As of today I am getting 15 -20 % hike . Should I sell it out looking at the economic trend or should I retain. I have long term plans with both the properties.

    Comment by sanjay agarwal — October 18, 2008 @ 1:46 pm

  108. Sanjay,

    I would sell the Commercial property and hold on to the Land..Commercial activity has already slowed and will slow significantly in the coming years..Move as much money out of these bubble investments as you can into something more tanglible and something that has more intrinsic value..Buy Gold, Silver, wheat, oil and other commodities..Holding onto cash is not a good idea either, since inflation is running way higher than Govt estimates and will get worse as the Govt prints more money..

    Devirsify your protofolio as much as you can..Have enough in Metals to last you at least 5 years in case your businees slows or you lose your job…In the worse case scenario..India may become like Zimbabawe with Hyperinflation..Even then you survive the 4-5 years of crisis by living off you agro-land

    Comment by Rohit — October 19, 2008 @ 1:39 am

  109. Just a quick question for all the experts:
    How many of you who are owing the house where you are residing (whether fully owned or bank loan funded) have deliberated on whether to sell the house when the prices are ripe and then buy back when Doom strikes? If not, then why not? Why don’t you guys make a great deal of money when you can??

    Comment by Dheeraj Matta — October 20, 2008 @ 7:59 pm

  110. I am holding on to my 3 apartments and a bungalow house in busiest parts of the southern metro. One of my apartment is currently becoming more commercialized. With this combo, whats the risk I should be expecting and what action plan I need to consider?

    Comment by Ashy — October 23, 2008 @ 11:00 pm

  111. Dheeraj,

    Its not that simple to predict peaks and bottoms in the real estate markets..The Market can stay irrational far longer than you or I can stay solvent..Therefore you look for trends..I can tell you right now if you sell your house Today and rent instead for 2-3 years you will be able to buy back your house or an equivalent house for either less than what you sell it for or the same price..One thing to distinguish is real gain from nominal rise..for example if the value of my investment or your property rises by 20% in 2009..but inflation is running at 25%..you actually loose 5% of your money

    I or anyone else cannot and should not call the bottom in this market..I can tell you right now property values are on thier way down in real terms, so are most other investments including stocks…Only think that can stop it from showing is if the Govt creates (prints) trillions of dollars to shore up real estate and equities…Which will lead to double triple digit inflation and a rise in commodity prices…

    BTW I am a Renter and sold my property back in fall of 2005…Renting is way cheaper and also you don’t have to worry about maintaince and other associated cost…I rather be renting a 2 crore flat for 80,000 Rs than paying Mortgage at 14% (2.3 lakhs just in interest not to mention principle and maintaince 4000 Rs)

    Comment by Rohit — October 26, 2008 @ 12:04 am

  112. Ashy,

    Have you paid off these properties..Or are you paying off the loan..What are the terms of the loan and how much skin do you have in the game (equity)??

    Comment by Rohit — October 26, 2008 @ 12:08 am

  113. Can any one be kind enough to advise me if the prices of building construction material, such as, iron, cement, bricks, sand…etc., will be coming down in the coming weeks/months or otherwise. Thanks indeed.

    Comment by Syed — November 1, 2008 @ 4:19 pm

  114. I live in London, and I’ve seen a massive increase in the advertisements for NRIs to invest in the Indian property market. The Middle East market in all the emirates in UAE have been in vogue until now, but India metro markets are beginning to make a comeback. The estate agents usually point out the double-digit growth of previous years, and shows some Excel models with the same rates projected forward a few years, as if the market has no signs of cooling.

    It’s a classic move to lure richer NRIs into markets where there is oversupply and bloated order books as a result of domestic investors/ purchasers pulling out.

    Comment by pratik — November 2, 2008 @ 7:30 pm

  115. I am planning to buy a 3bhk flat in pimple saudagar,pune.But the rates qototed by the builder is Rs 3000/ and he is giveing asll the home appliances free(lcd,fridge,oven ect),but my budget is only 23,00000-2500000,So will the rates come down by this May

    Comment by jaideep — December 10, 2008 @ 6:41 pm

  116. The financial crisis arrived in India. It all started with the mortgage markets in the US. It is not easy to localize ownership of these loans / Mortgage Backed Securities. If that is not possible, where should governments start applying their measures?

    Comment by Agi James Makil — December 14, 2008 @ 2:25 pm

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